UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A No. 2
{X} Annual Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1997
or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ............... to ...............
Commission file number 1-13962
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. 1)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 239-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Class A Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K.
As of February 27, 1998 there were outstanding 30,446,171 shares of Class A
Common Stock. Based on the closing price of $23.375 per share of Class A Common
Stock as of such date, the aggregate market value of Registrant's Shares held by
non-affiliates was approximately $508 million.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
<TABLE>
Part II
Item 6. Selected Financial Data
The selected statement of operations data set forth below with respect to
the years ended December 31, 1997, 1996, 1995, 1994 and 1993, and the balance
sheet data at December 31, 1997, 1996, 1995, 1994 and 1993 are derived from and
are qualified by reference to, the Consolidated Financial Statements of the
Company and the Notes thereto and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as Item 7 in this Form 10-K/A No. 2.
The tables set forth below provide a variety of statistical information
about Insignia. Insignia believes that Net EBITDA, which is defined as earnings
before interest, income taxes, depreciation and amortization (excluding equity
earnings, apartment properties, and minority interests) ("EBITDA") combined with
funds from operations (as hereinafter defined "FFO"), less interest expense and
earnings allocable to preferred securities, is a significant indicator of the
strength of its results. EBITDA is a measure of a company's ability to generate
cash to service its obligations, including debt service obligations, and to
finance capital and other expenditures, including expenditures for acquisitions.
FFO is defined as income or loss from the real estate operations, which is net
income in accordance with generally accepted accounting principles excluding
gains or losses from debt restructuring, sales of property, and minority
interests, plus depreciation and provision for impairment. Neither EBITDA nor
FFO represent cash flow as defined by generally accepted accounting principles
and do not necessarily represent amounts of cash available to fund Insignia's
cash requirements.
SUMMARY HISTORICAL FINANCIAL DATA
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(In thousands except per share data)
Statement of Operations Data(1):
<S> <C> <C> <C> <C> <C>
Revenues $400,843 $227,074 $123,032 $75,453 $52,577
Operating expenses 325,886 172,046 94,727 54,757 37,720
Equity earnings 10,027 3,590 2,461 113 --
Income before extraordinary item 10,233 9,266 6,258 7,261 4,925
Extraordinary loss -- (702) (452) -- (255)
Net income 10,233 8,564 5,806 7,261 4,670
Income per common share before
extraordinary item - diluted $ 0.32 $ 0.28 $ 0.22 $ 0.35 $ 0.34
Net income per common share - diluted $ 0.32 $ 0.26 $ 0.20 $ 0.35 $ 0.32
</TABLE>
<TABLE>
<CAPTION>
December 31,
(In thousands)
1997 1996 1995 1994 1993
Balance Sheet Data(1):
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 88,847 $ 54,614 $ 49,846 $ 36,596 $ 34,005
Property management contracts 147,256 122,915 88,816 73,411 38,620
Investment in real estate limited 215,735 150,863 60,473 37,926 --
partnerships and other securities
Total assets 800,223 492,402 245,409 174,272 88,835
Notes payable 170,404 49,840 32,996 63,198 1,139
Redeemable convertible preferred
stock -- -- 15,000 -- --
Company-obligated mandatory
redeemable Convertible preferred
securities of a Subsidiary trust 144,065 144,169 -- -- --
Stockholders' equity 237,909 217,905 157,013 78,806 71,540
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(In thousands)
Cash Flow Data (1):
Cash provided by operating
<S> <C> <C> <C> <C> <C>
activities $ 39,963 $ 15,894 $ 15,424 $ 13,655 $ 11,382
Cash used in investing activities (160,179)(170,068) (56,710) (35,151) (14,932)
Cash provided by financing
activities 154,449 158,942 54,536 24,087 26,222
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(In thousands except properties managed)
Supplemental Data
<S> <C> <C> <C> <C> <C> <C>
EBITDA(2) $ 57,312 $ 49,008 $ 28,305 $ 20,696 $ 14,857
Combined EBITDA and FFO(3) 78,844 62,449 32,916 20,809 14,857
Net EBITDA(4) 60,974 47,713 24,622 20,067 13,988
Properties managed:
Residential (units) 280,000 265,000 261,000 216,000 141,000
Commercial properties
(thousands of sq. ft.) 160,000 110,000 64,000 43,000 25,000
</TABLE>
(1) The Company and its affiliates have acquired control of, or management
rights to, 43 portfolios of properties since 1990, the results of which
affect the comparability of operations.
(2) Earnings before interest expense, taxes, depreciation and amortization
(excluding equity earnings).
(3) Funds from operations is a measure of real estate operations, which
represents net income or loss in accordance with generally accepted
accounting principles excluding gains or losses from debt restructuring,
sales of property, and minority interests plus depreciation and provisions
for impairment. (See table below for detailed calculation of combined
EBITDA and FFO.)
(4) EBITDA and FFO less interest expense and earnings allocable to preferred
securities.
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands)
1997 1996 1995 1994 1993
Calculation of Combined EBITDA
and FFO
<S> <C> <C> <C> <C> <C>
Fee based services revenue $388,922 $215,623 $118,828 $72,576 $51,355
Interests 4,571 3,104 2,780 1,457 652
Other 704 2,327 1,424 1,420 570
394,197 221,054 123,032 75,453 52,577
Less:
Fee based services expenses 315,653 164,830 85,707 49,090 32,469
Administrative and other 10,233 7,216 8,020 5,667 3,751
Release fee 5,000 -- -- -- --
Legal reserve 5,202 -- -- -- --
Termination of employment
agreements -- -- 1,000 -- 1,500
Loss attributable to IPT 797 -- -- -- --
EBITDA - service company 57,312 49,008 28,305 20,696 14,857
FFO from real estate 21,5320 13,441 4,611 113 --
Combined EBITDA and FFO $ 78,844 $ 62,449 $ 32,916 $20,809 $14,857
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Insignia's prime objective is to increase income from operations and
stockholder value through strategic growth in the assets that provide such
returns. The Company posted strong results in pursuit of these objectives for
the year ended December 31, 1997 on sharply higher revenues. The Company uses
Net EBITDA as a primary indicator of financial performance and Net EBITDA
increased 28% to $61.0 million in comparison to 1996. These financial results
are impacted by various one-time charges totaling $12.3 million in aggregate,
including the previously announced $5 million release fee paid to the United
States Department of Housing and Urban Development ("HUD") during the third
quarter and $5.2 million in related legal costs and reserves for future costs in
the fourth quarter. Net EBITDA, excluding the one time charges, would have
increased 54% to $73.3 million in comparison to 1996. EBITDA for the service
company increased 17% to $57.3 million while total FFO increased 60% to $21.5
million in comparison to 1996, respectively. Assets grew 63% from $492.4 million
at December 31, 1996 to $800.2 million at December 31, 1997. Growth occurred
mainly in receivables, investments in real estate limited partnerships, property
management contracts, and costs in excess of net assets of acquired businesses.
The growth in these areas is primarily due to the impact of acquisitions closed
in 1997.
During 1997, the Company completed ten business acquisitions, including
expansion internationally through the purchase of 60% of the stock in CAGISA, a
leading management company in Italy. Other acquisitions completed include the
following: Rostenberg Doern Company, Inc., HMB Property Services, Inc., Frain,
Camins & Swartchild, Inc. ("FC&S"), The Related Companies of Florida, Radius
Retail Advisors, Forum Properties, Inc., Realty One, Inc., 100% of the Class B
stock of First Winthrop Corporation and a general partnership interest in
Winthrop Financial Associates ("Winthrop"), and Barnes, Morris, Pardoe & Foster.
The businesses, including CAGISA, were acquired for aggregate purchase
consideration of approximately $136.7 million with $101.6 million from cash on
hand ($95.8 million, net of acquired cash from acquisition entities of $5.8
million), $4.2 million of the Company's Class A Common Stock, notes payable of
$528,000 (net of $8.0 million in notes receivable), and $30.4 million in accrued
liabilities and deferred taxes.
Cash and cash equivalents increased 63% from $54.6 million at December 31,
1996 to $88.8 million at December 31, 1997. The primary sources of funds include
the receipt of $62.4 million by Insignia Properties Trust ("IPT"), a
consolidated subsidiary of the Company, from private placement offerings of its
securities, $38.1 million in collections from limited partnership distributions,
and $111 million from borrowings under the revolving credit facility. The major
uses of funds include $95.8 million paid for the acquisition of management
contracts and acquired businesses (discussed above) and $93.1 million for the
purchase of real estate limited partnership interests. See the Statement of Cash
Flows and the discussion in the Liquidity and Capital Resources section below
for more information.
Receivables increased 165% from $46.0 million at December 31, 1996 to
$122.2 million at December 31, 1997. This increase is primarily due to
substantially increased brokerage and leasing activity transactions primarily in
the commercial segment, coupled with substantial increases in operations from
current year acquisitions. The increase in brokerage and leasing transactions is
attributable to the growth in revenues generated by acquisitions, primarily ESG,
Paragon and FC&S, over the past 18 months. Such receivables are to be collected
at future dates as defined in the terms of the individual brokerage agreements.
Property and equipment increased 57% from $12.1 million at December 31,
1996 to $19.0 million at December 31, 1997. This change is primarily due to
expenditures for computer equipment and software in connection with the
implementation of a change in the Company's computer platform. Also,
contributing to the increase is approximately $2.4 million in property and
equipment acquired through current year acquisition purchases.
Investments in real estate limited partnerships and other securities
increased 43% from $150.9 million at December 31, 1996 to $215.7 million at
December 31, 1997. This increase resulted primarily from the investment of $93.1
million in additional limited partnership interests through acquisitions,
secondary market purchases and real estate joint ventures, net of distributions
received of $38.1 million. Also contributing to the increase was the recognition
of $10.0 million in equity earnings for 1997.
Property management contracts increased 20% from $122.9 million at December
31, 1996 to $147.3 million at December 31, 1997. During 1997, the Company
completed the acquisition of 10 businesses which in aggregate contributed
approximately $54.6 million in additional management contract bases. These
acquisition purchases are offset by $23.2 million in amortization expense and
the collection of approximately $6.8 million in disposition fees from the sale
of real estate in limited partnerships syndicated by The Balcor Company
("Balcor"). In the second quarter of 1996, Balcor announced its intentions to
sell a large portion of the properties covered by these management contracts.
The Company entered into an agreement with Balcor whereby an advisory fee would
be paid to the Company for services rendered in the sales transactions. The fees
are paid in cash after close of the sale transaction and have been applied to
the remaining unamortized contract basis associated with the Balcor properties.
Costs in excess of net assets of acquired businesses increased 110% from
$75.6 million at December 31, 1996 to $158.5 million at December 31, 1997. The
increase is primarily a result of the payment of purchase price of approximately
$87.4 million in excess of the net assets of acquired entities in 1997.
Other assets increased 223% from $8.1 million at December 31, 1996 to $26.3
million at December 31, 1997. This increase is primarily due to acquisitions and
internal growth within the Company. Contributing to this increase is 1) the
capitalization of certain costs, in the amount of approximately $5.0 million, in
connection with the implementation of a change in the Company's computer
platform, 2) organization costs in the formation of IPT and proposed merger
costs with AMIT aggregating approximately $4.5 million, and 3) investments in
debt instruments totaling approximately $3.0 million.
Accounts payable increased 701% from $1.7 million at December 31, 1996 to
$13.7 million at December 31, 1997. Contributing to the increase is
approximately $6.9 million in payables acquired through the purchases of CAGISA
and Realty One in combination with significant increases in operations in the
commercial segment from current year acquisition activity.
Commissions payable at December 31, 1997 increased 174% or $32.5 million
over December 31, 1996. Consistent with the change in receivables, this increase
is attributable to substantially increased brokerage and leasing activity
transactions from acquisitions over the past 18 months.
Accrued and sundry liabilities increased 150% from $40.7 million at
December 31, 1996 to $102.0 million at December 31, 1997. This increase is
primarily due to the addition of approximately $30.4 million in accrued
acquisition liabilities and deferred tax liabilities coupled with a $13.3
million increase in accrued employee compensation and incentives compared to
1996.
Minority interests in consolidated subsidiaries of $61.5 million at
December 31, 1997 represents the minority equity in IPT from private placement
offerings in combination with the minority equity in CAGISA.
Notes payable increased 242% from $49.8 million at December 31, 1996 to
$170.4 million at December 31, 1997. This increase is attributable to
acquisition purchases in 1997 which resulted in $111 million in additional
borrowings on the revolving credit facility coupled with assumed notes payable
of approximately $20.9 million in the Realty One purchase.
Stockholders' equity increased 9% from $217.9 million at December 31, 1996
to $237.9 million at December 31, 1997 primary due to the receipt of $7.5
million from the issuance of common stock from the exercise of options; the
issuance of the Company's Class A Common Stock in the amount of $4.2 million for
the purchase of Realty One; and net income of $10.2 million for 1997.
<PAGE>
Results of Operations for the Years Ended December 31, 1997 and 1996
Insignia posted strong results in all major components of operational
activity for 1997 due primarily to continued acquisition activity. The Company
uses Net EBITDA as a primary indicator of its financial performance, and Net
EBITDA increased 28% from $47.7 million in 1996 to $61.0 million in 1997. Net
EBITDA per common share increased 33% from $1.45 in 1996 to $1.93 in 1997.
EBITDA for the service company increased 17% from $49.0 million to $57.3 million
and total FFO from real estate operations of IPT and co-investments increased
from $13.4 million to $21.5 million for 1996 and 1997, respectively. These
financial results are impacted by one-time charges totaling $12.3 million in
aggregate, including $10.2 million in HUD related release fees, legal costs, and
reserves for future costs. Excluding the one time charges, Net EBITDA would have
reflected gains of 54% to $73.3 million and EBITDA for the service company would
have reflected gains of 42% to $69.6 million in comparison to 1996.
Total revenues increased 77% or $173.8 million for the year from $227.1
million in 1996 to $400.8 million in 1997. The growth in revenues is primarily
reflected in fee based services, which posted gains of 80% to $388.9 million, in
comparison to 1996. This growth rate is primarily attributable to the fee based
services revenue in the commercial group, which posted impressive gains of
approximately 152% from $98.0 million in 1996 to $246.4 million in 1997. This
increase is reflective of the contributions of a full year of operations of ESG
and Paragon, which were acquired on June 30, 1996, and the six commercial
acquisitions in 1997. Fee based services revenue for the residential group
posted an increase of 22% from $111.2 million in 1996 to $135.6 million in 1997.
This growth is due primarily to the contributions in fee based services revenue
of the four residential acquisitions in 1997, including CAGISA in Italy.
Interest income increased 47% from $3.1 million in 1996 to $4.6 million in
1997 due to higher average interest bearing cash holdings in the current year
compared to 1996.
Apartment property revenue, which represents the operations of a controlled
limited partnership, increased 10% to $6.6 million due primarily to increased
rental activity at the property in comparison to 1996.
Fee based services expense increased 92% from $164.8 million in 1996 to
$315.7 million in 1997. Consistent with fee based services revenue, fee based
services expense increased significantly in the commercial group as a direct
result of the eight commercial acquisitions over the past eighteen months. Fee
based services expense for the commercial group increased 142% from $85.4
million in 1996 to $207.0 million in 1997. Fee based services expense for the
residential group, which include a one-time charge of $2.1 million for a note
receivable deemed uncollectible, reflected an increase of 35% from $71.6 million
in 1996 to $96.9 million in 1997.
Administrative expenses increased 42% from $7.2 million in 1996 to $10.2
million in 1997. This increase, which is significantly lower that the growth
rate in revenues, is due in part to the increased operational expansion over the
course of 1997 and clearly demonstrates the Company's ability to efficiently
absorb acquisitions into its existing administrative and corporate
infrastructure.
Interest expense decreased 39% from $12.9 million in 1996 to $7.9 million
in 1997. This decrease is directly attributable to lower average outstanding
borrowings on the revolving credit facility in 1997 compared to 1996.
Contributing to the lower outstanding borrowings in 1997 was the use of proceeds
from the issuance of the trust based convertible preferred securities in
November 1996 to pay down outstanding notes payable.
Depreciation and amortization increased 38% from $23.0 million in 1996 to
$31.7 million in 1997. This increase is consistent with the growth of the
Company over the past twelve months attributable to acquisitions. These
acquisitions have reflected significant purchases of amortizable assets
resulting in a corresponding increase in amortization expense. In addition, the
57% growth in property and equipment from internal growth and acquisition
activity has resulted in a similar increase in depreciation expense in 1997.
The $5 million release fee represents a negotiated one time payment to HUD
to remove the Company from any potential liability in a civil lawsuit filed by
HUD against one of the third party unaffiliated owners of affordable housing to
which the Company provides management services. The $5.2 million legal reserve
represents the one-time charge for HUD related legal costs and reserves for
potential future incremental costs that the Company believes may result from its
management of HUD properties. The Company does not anticipate further costs
beyond those incurred and accrued in 1997.
Equity earnings increased 179% from $3.6 million in 1996 to $10.0 million
in 1997. This increase is attributable to: 1) equity earnings of $645,000 from
investments in co-investment partnerships (no comparable earnings from these
investments existed in 1996); 2) significant purchases of limited partnership
interests in partnerships for which no investments existed in 1996; 3) increased
ownership in IPT controlled partnerships through tender offers in the 4th
quarter of 1997; and 4) the continued improvement in the operating results of
IPT controlled partnerships as discussed in the Financial Conditions section on
FFO above.
Minority interests in consolidated subsidiaries increased 530% from $2.0
million in 1996 to $12.4 million in 1997. This increase is primarily due to: 1)
$10 million in dividends paid on the trust based convertible preferred
securities in 1997 compared to $1.6 million in 1996 (the securities were issued
in November 1996); 2) $1.2 million in minority equity in the current year
earnings of IPT (the Company held an average 87% aggregate ownership interest in
IPT for 1997 compared to 100% in 1996); and 3) $1.3 million in charges resulting
from distributions made by a majority owned partnership subsidiary of IPT to the
holders of minority equity interests (which resulted in negative equity for the
minority owners). Generally accepted accounting principles requires such charges
to be taken by the majority owner on the presumption that the negative equity of
the minority owners on a historical book value basis cannot be recovered by the
majority owner.
The provision for income taxes increased 20% from $5.7 million in 1996 to
$6.8 million in 1997. This increase is attributable to the rise in net income in
comparison to 1996 coupled with an increase in the effective tax rate from 38%
to 40% because of changes in assets and their tax bases as determined by the
structure of the purchase agreements for acquisitions completed over the past
twelve months and higher tax rates where these acquisitions occurred.
As a result of the foregoing factors, net income increased 19% to $10.2
million in 1997 compared to $8.6 million in 1996. Diluted earnings per share
increased to $.32 for 1997 compared to $.26 for 1996. If the Company had elected
to follow FASB Statement No. 123, "Accounting for Stock-Based Compensation," pro
forma net income would have been $6.8 million for 1997 compared to pro forma net
income for 1996 of $3.2 million; and pro forma diluted earnings per share would
have been $.22 for 1997 compared to pro forma diluted earnings per share of $.10
for 1996.
Results of Operations for the Years Ended December 31, 1996 and 1995
Acquisition activity and real estate investing were the primary reasons for
the Company's growth in results from operations, reflected by an increase of 90%
in combined EBITDA and FFO, from $32.9 million for 1995 to $62.4 million for
1996; and an increase of 94% in Net EBITDA, from $24.6 million for 1995 to $47.7
million for 1996.
The Company uses Net EBITDA as a primary indicator of its financial
performance, which is combined EBITDA and FFO less interest expense and earnings
allocable to preferred securities. See the table in Liquidity and Capital
Resources that breaks out all components of Net EBITDA. Net EBITDA per share was
$1.45 for 1996 compared to $1.09 for 1995.
Revenues increased 85% for the year from $123.0 million for 1995 to $227.1
million for 1996, with the primary growth being in fee based services revenues.
The acquisitions completed during the year contributed substantially to the
growth, with those acquisitions being the NPI acquisition in January 1996 and
the ESG and Paragon acquisitions in June 1996.
Other income increased $903,000 from $1.4 million for 1995 to $2.3 million
for 1996. The primary reason for the increase was an increase of $300,000 in
amounts received from an agency that serves as an insurance broker for various
partnerships managed by the Company, and approximately $360,000 in a gain on the
sale of a participation note. Various other items flowed through other income
such as miscellaneous fees and legal reimbursements.
Fee based services expenses increased 92% from $85.7 million for 1995 to
$164.8 million for 1996. This increase is primarily caused by the completed
acquisitions mentioned previously, as well as expenses incurred in connection
with unsuccessful acquisitions of approximately $935,000. Fee based service
expenses have increased at a higher percentage than fee based service revenues
as a result of lower profit margins attributable to recent commercial
acquisitions. Also included in fee based services revenues and expenses are the
results of the Company's activities in the consumer services area with
operations contributing losses of $2.0 million for the year.
Administrative expenses decreased 10% from $8.0 million for 1995 to $7.2
million for 1996. This decrease was achieved through a reduction in occupancy
costs with some of the functions decentralizing to other locations within the
Company; and the revised structure of the Company's insurance program for its
operations.
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 year ended December 31, 1996.
Interest expense increased 83% from $7.0 million for 1995 to $12.9 million
for 1996, primarily as a result of the higher debt balances carried as a result
of 1996 acquisitions.
With the acquisition of limited partner interests in excess of 50% in a
limited partnership, the Company now consolidates the results of the NPI 4
Partnership. The categories entitled apartment property revenues, apartment
property expenses, apartment property interest and depreciation relate solely to
the operations of the property owned by the partnership.
Depreciation and amortization increased 71% from $13.5 million for 1995 to
$23.0 million for 1996. This is a result of the amortization of the acquired
property management contracts, goodwill, and the additions to property and
equipment.
Equity earnings increased from $2.5 million for 1995 to $3.6 million for
1996, primarily as a result of the increased ownership of real estate limited
partner interests. On a same store basis, revenues for the underlying properties
increased 4.5% over 1995, and expenses (excluding major repairs and maintenance
mentioned previously) increased 1.7% over 1995. The Company also accomplished
the refinancing of $164 million in loans on 33 properties. These refinancings
decreased interest costs at the partnership level, and increased cash available
for distribution. Funds from operations increased from $4.6 million for 1995 to
$13.4 million for 1996.
Minority interests also includes a $1.6 million distribution reflecting the
carrying costs on the Preferred Securities, as this is a form of outside
ownership. The Trust issued $149.5 million in such Preferred Securities in the
fourth quarter of 1996, with the Company owning 100% of the common securities of
the Trust.
The provision for income taxes increased 48% from $3.8 million for 1995 to
$5.7 million for 1996 in direct proportion to the increase in income before
income taxes and extraordinary item, resulting from the factors discussed above.
The extraordinary item relates to the early extinguishment of debt on the
Company's books for 1995, and on the limited partnerships' books of which the
Company owns equity interests for 1996.
As a result of the foregoing factors, net income increased 48% to $8.6
million in 1996 compared to $5.8 million in 1995. Diluted earnings per share
increased to $.26 for 1996 compared to $.20 for 1995. If the Company had elected
to follow FASB Statement No. 123, "Accounting for Stock-Based Compensation," pro
forma net income would have been $3.2 million for 1996 compared to pro forma net
income for 1995 of $1.2 million; and pro forma diluted earnings per share would
have been $.10 for 1996 compared to pro forma diluted earnings per share of $.05
for 1995.
Year 2000 Compliance
Insignia has completed an assessment on the impact of the year 2000 issue
and has determined that it will have to modify or replace portions of its
software so that computer systems will function properly with respect to dates
in the year 2000 and thereafter. The project is estimated to be completed no
later than early 1999, which is prior to any anticipated impact on its operating
systems. The Company believes that with current ongoing changes in its computer
platform, expected to be complete later in 1998, coupled with current
modifications to existing software and software conversions, the year 2000
issues will not pose significant operational problems for its computer systems.
The Company is currently assessing the extent to which its operations are
vulnerable should third party vendors and other organizations, with which the
Company conducts business, fail to remediate properly their computer systems. In
the event that such necessary modifications and conversions are not made, or are
not completed in a timely fashion, the year 2000 issue could potentially have a
material impact on the operations of the Company. The Company anticipates that
Year 2000 compliance will cost approximately $1.3 million of which $860,000 has
been spent to date.
Impact Of Inflation And Changing Prices
The revenues of the property management division are highly dependent upon
the aggregate rents of the properties it manages, which are affected by rental
rates and building occupancy rates. Rental rate increases are highly dependent
upon market conditions and the competitive environments in the properties'
locations. Employee compensation is the principal cost element of property
management. Recent price and cost trends have not significantly affected profit
margins, and are not expected to have significant negative effects in the
foreseeable future. Interest rate fluctuations generally do not adversely affect
a property's ability to perform due to the underlying debt carrying fixed rates.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services, inasmuch as such prices are
affected by inflation.
For the last several years, rental and occupancy rates across the country
have generally been stable. However, in most areas of the Company's operations,
the absence for several years of any significant new apartment construction is
now resulting in upward pressure on both occupancy and rental levels. Certain
aspects of the Company's operations are subject to regulation by the U. S.
Department of Housing and Urban Development ("HUD"). Rental rates of HUD
properties are generally based on the expenses of maintaining the properties,
rather than market forces, and are subject to regulatory approval. Occupancy
rates of HUD properties, as well as both occupancy and rental rates at non-HUD
properties, generally respond to market forces along with other properties in a
region. The Company believes that increased collected rents arising from either
higher occupancy or higher rents would have no material effect on overhead
costs. There can be no assurance that rent collections will increase or that
costs will not increase due to inflation or other causes.
The programs administered by HUD have been under continuing review by the
United States Congress. Recent changes could result in reductions of rents, on
which management fees generally are based, in some HUD-subsidized projects. In
addition, rent subsidies which currently are tied to projects may be converted
to "tenant-based" assistance, permitting tenants in subsidized projects to
retain their subsidies while moving elsewhere. The occupancy level or rental
rates of such projects could be affected and, accordingly, the management fee
paid to the property manager could be reduced. It is possible that changes in
programs administered by HUD could result in lower rental revenue and project
cash flow from which management and other fees are derived; however, the details
of the implementation of recent changes are not yet sufficiently specific to
determine their actual impact on such fees, if any. Approximately 13% of the
residential units managed by the Company were housing projects subsidized under
various government programs administered by HUD.
Other
Certain items discussed in this report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of 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 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>
<TABLE>
Liquidity And Capital Resources
The Company has several sources available for capital, primarily cash
generated from operations, distributions from IPT controlled and co-investment
partnerships, and available credit under the $275 million Revolving Credit
Facility. At December 31, 1997, a total of $144 million was outstanding under
this facility. As a result of its ability to generate cash, and such additional
sources, cash balances grew from $54.6 million at December 31, 1996 to $88.8
million at December 31, 1997. The Company uses Net EBITDA as an indicator of its
working capital generated from operations. Net EBITDA increased 28% to $61.0
million in comparison to 1996. Net EBITDA, excluding $12.3 million in one-time
charges, would have increased 54% to $73.3 million in comparison to 1996. The
following chart specifically identifies the sources of Net EBITDA and how the
numbers are derived for each period.
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
Fee based services revenue $388,922 $215,623
Interest 4,571 3,104
Other 704 2,327
394,197 221,054
Less:
Fee based services expenses 315,653 164,830
Administrative and other 10,233 7,216
Release fee 5,000 --
Legal reserve 5,202 --
Earnings attributable to IPT(1) 797 --
EBITDA - service company 57,312 49,008
FFO from real estate interests 21,532 13,441
Combined EBITDA and FFO 78,844 62,449
Interest expense (7,867) (12,918)
Preferred distributions (10,003) (1,818)
Net EBITDA $ 60,974 $ 47,713
</TABLE>
(1) Earnings of $797,000 attributable to the operations of IPT (which is
included in the consolidated income statement for the Company) are excluded
from EBITDA for the service company. These earnings are included in FFO
above.
As part of the Company's cash management program, investments are
periodically made in reverse repurchase agreements collateralized by obligations
of the government National Mortgage Association ("GNMA") with maturities of one
to three weeks. The Company generally does not take possession of the securities
purchased under agreements to resell.
At December 31, 1997, the Company had cash and cash equivalents of $88.8
million as a result of positive cash flow from operations, distributions from
partnerships, proceeds from private placement offerings of IPT, and the proceeds
from its debt sources. With the working capital generated through the operations
of the Company and the remaining availability under the Revolving Credit
Facility, management believes that the Company's cash and capital resources will
be sufficient to finance the Company's operations for 1998. The Company's
funding needs are reassessed as acquisitions are identified and pursued.
<PAGE>
Subsequent Events
Cohen Financial Transactions. On January 7, 1998, the Company acquired the
rights to perform property management, leasing and construction supervision
services for approximately 4.1 million square feet of commercial real estate
from Cohen Financial. The purchase price was approximately $1 million, all of
which was paid in cash.
Goldie B. Wolfe & Company. On January 20, 1998, the Company acquired 100%
of the stock of Goldie B. Wolfe & Company, a commercial real estate services
firm. The purchase price was approximately $5.3 million, all of which was paid
in cash.
MAE GP Merger. Effective as of March 7, 1998, MAE GP Corporation ("MAE
GP"), which until then was a wholly-owned subsidiary of MAE, was merged with and
into IPT, with IPT surviving the merger (the "MAE GP Merger"). As consideration
for the MAE GP Merger, IPT issued 332,300 shares of the common stock of IPT to
MAE valued for purposes of the MAE GP Merger at $10.53 per share.
MAE GP owned or controlled equity interests in entities which comprised or
controlled the general partners of 29 public and 76 private real estate limited
partnerships (collectively, the "MAE Partnerships"), nine of which are included
in the IPT Partnerships. The MAE Partnerships own, in the aggregate, 169
properties containing approximately 32,000 residential apartment units and
approximately 2.3 million square feet of commercial space. In connection with
the MAE GP Merger, all of the shares of Class B common stock of AMIT, a real
estate investment trust that has entered into a definitive agreement to be
merged with IPT, which were until then owned by MAE GP, were transferred by
dividend to MAE prior to the MAE GP Merger.
In connection with the MAE GP Merger, on February 17, 1998, IPLP purchased
certain assets described below from MAE for approximately $596,000. The assets
purchased by IPLP from MAE consisted of (i) a 99% limited partner interest in
Insignia Jacques Miller, L.P. ("IJM"), which in turn owns non-controlling equity
interests in entities that comprise or control the general partners of 30 of the
MAE Partnerships and various notes receivable (the 1% general partner interest
in IJM was acquired by IPT from MAE GP in the MAE GP Merger), and (ii) a 6.557%
limited partner interest in Buccaneer Trace Limited Partnership, which owns a
208-unit residential apartment complex located in Savannah, Georgia.
Also in connection with the MAE GP Merger, on February 17, 1998, Insignia
contributed all of the limited partner interests it owned in the MAE
Partnerships to IPLP in exchange for units of limited partnership in IPLP ("OP
Units"). The value of the interests contributed was approximately $5,460,000,
for which Insignia received 518,528 OP Units (based on a value of $10.53 per
unit).
Richard Ellis Group Limited Acquisition. In January 1998, the shareholders
of Richard Ellis Group Limited ("Richard Ellis") accepted the Company's offer to
acquire 100% of the stock of Richard Ellis. Richard Ellis is a real estate
services and investment firm located in the United Kingdom. The transaction is
valued at approximately $81.5 million, including approximately $14.7 million of
which is contingent on future performance measures. The transaction was
completed on February 26, 1998. The Company funded the acquisition by borrowing
$35 million from its revolving credit facility, issuing 617,000 shares of its
Class A Common Stock, and assuming existing options to purchase 856,000 shares
of its Class A Common Stock.
Merger and Stock Spin-off. On March 17, 1998, the Company and Insignia/ESG,
Inc. ("Insignia/ESG") entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Apartment Investment and Management Company, a Maryland
corporation ("AIMCO"), and AIMCO Properties, L.P., a Delaware limited
partnership, pursuant to which the Company will merge with and into AIMCO, with
AIMCO as the survivor (the "Merger"). Consummation of the Merger is subject to
certain conditions, including regulatory approval and the approval of the
stockholders of the Company (but not the approval of the stockholders of AIMCO).
Prior to the AIMCO Merger, the Company will spin off to its stockholders
the stock of an entity that will become a separate public company and will
include Insignia/ESG; the international commercial real estate service company,
Insignia Residential-New York, a New York based cooperative and condominium
management company; the Company's single-family home brokerage operations and
other select holdings. Pursuant to an Indemnification Agreement entered into in
connection with the Merger Agreement, the spun off company will provide
indemnification for certain liabilities arising under the Merger Agreement.
Assuming the stockholders of AIMCO approve the Merger, shares of the
Company's Class A Common Stock will be converted into the right to receive an
aggregate of approximately $303 million in Series E Preferred Stock, par value
$.01 per share of AIMCO (the "Series E Preferred"). In addition to receiving the
same dividends as holders of AIMCO common stock, holders of Series E Preferred
are entitled to receive a preferred dividend of $50 million in the aggregate to
be paid on or before January 15, 1999 and when paid, the Series E Preferred will
automatically convert into AIMCO common stock on a one for one basis, subject to
certain antidilution adjustments. The actual number of Series E Preferred issued
in the Merger will be determined by a formula based on the average market price
of AIMCO's common stock during a fixed period preceding the Merger, subject to a
fixed maximum AIMCO exchange value of $38 per share. If AIMCO's average price
during that period is less than $36.50 per share, AIMCO may elect to pay up to
$15 million of the purchase price in cash, provided that such payment would not
affect the tax free status of the Merger.
In addition, AIMCO will assume approximately $308 million in outstanding
indebtedness of the Company and will assume approximately $150 million of the
6.5% Trust Convertible Preferred Securities issued by Insignia Financing I, a
subsidiary of the Company.
If the stockholders of AIMCO do not approve the Merger, the Merger may
nonetheless be consummated. However, instead of receiving approximately $303 in
Series E Preferred, holders of the Company's Class A Common Stock would receive
approximately $203 million in Series E Preferred and $100 million in Series F
Preferred Stock, par value $.01 per share of AIMCO (the "Series F Preferred").
In either case, holders of Series E Preferred would be entitled to receive the
$50 million preferred dividend. Holders of Series F Preferred are entitled to
receive the greater of (i) the same dividends as holders of AIMCO common stock
receive and (ii) preferred distributions of 10% of the face value of the Series
F Preferred, with the preferred return rate escalating 1% each year until a 15%
annual return is achieved. Upon the approval by the stockholders of AIMCO, the
Series F Preferred will convert into Series E Preferred on a one-to-one basis.
Also, the Merger Agreement provides that following the Merger, AIMCO is
required to offer to purchase the outstanding shares of beneficial interest of
IPT, a Maryland real estate investment trust, at a price of at least $13.25 per
IPT share.
As a condition to execution with the Merger Agreement, certain of the
Company's executive officers executed voting agreements and irrevocable proxies
in favor of AIMCO, pursuant to which each of the foregoing individuals agreed to
vote the shares of the Company's Class A Common Stock owned of record and
beneficially by him, including shares acquired after the date of the execution
of the agreement (but excluding shares beneficially owned by others
notwithstanding that such shares may be owned of record by him) in favor of the
Merger and the Merger Agreement and against any competing transaction. In
addition, each of Metropolitan Acquisition Partners IV, L.P. and Metropolitan
Acquisition Partners V, L.P. (collectively, the "MAPs") also executed voting
agreements and irrevocable proxies, pursuant to which each has agreed to vote
certain shares of the Company's Class A Common Stock to which the Company's
Chairman, Chief Executive Officer, and President would be entitled in a
distribution of shares of the Company's Class A Common Stock made by the MAPs in
favor of the Merger and the Merger Agreement and against any competing
transaction.
<PAGE>
<TABLE>
Part III
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 28, 1998 by: (i) each stockholder
known by Insignia to beneficially own in excess of 5% of the outstanding shares
of Common Stock, (ii) each director, (iii) the Chairman, Chief Executive Officer
and President, and each of the other four most highly compensated executive
officers, and (iv) all directors and executive officers as a group. Except as
otherwise indicated in the footnotes to the table, the persons named below have
sole voting and investment power with respect to the shares beneficially owned
by such persons.
<CAPTION>
Beneficial Ownership
Name and Address Shares Percent
<S> <C> <C>
Metropolitan Acquisition Partners 2,237,258 7.3%
IV, L.P. c/o Metro Shelter Directives, Inc.
One Insignia Financial Plaza
Greenville, South Carolina 29602
Andrew L. Farkas 5,760,499 (1) 18.4%
Insignia Financial Group, Inc.
One Insignia Financial Plaza
Greenville, South Carolina 29602
Apollo Real Estate Investment Fund, L.P. 3,944,686 (2) 12.4%
c/o Apollo Real Estate Fund, L.P.
2 Manhattanville Road
Purchase, New York 10577
Janus Capital Corporation(3) 2,206,700 7.2%
100 Filmore Street, Suite 300
Denver, Colorado 80206
The Capital Group Companies, Inc. (4) 3,274,230 10.6%
333 South Hope Street
Los Angeles, California 90071
Palisade Capital Management, L.L.C. 1,787,862 (5) 5.7%
1 Bridge Plaza, Suite 695
Fort Lee, New Jersey 07024
Robert J. Denison(6)(7) 403,724 1.3%
Robin L. Farkas(6)(8) 166,777 *
Merril M. Halpern(19) 24,000 *
Robert G. Koen(10) 24,000 *
Michael Lipstein(6)(10) 124,707 *
Buck Mickel(6)(10) 77,668 *
James A. Aston(11) 304,983 1.0%
Frank M. Garrison(12) 217,139 *
Edward S. Gordon(13) 695,879 2.3%
Stephen B. Siegel(14) 171,680 *
All directors and executive officers 9,181,138 27.9%
as a group (23 individuals)(1)(15)(16)
</TABLE>
* Less than one percent.
(1) Includes shares owned by (i) Metropolitan Acquisition Partners IV, L.P.
("MAP IV"), (ii) Metropolitan Acquisition Partners V, L.P. ("MAP V"), (iii)
Metro Shelter Directives, Inc. and MV, Inc., the general partners of MAP IV
and MAP V, respectively, (iv) certain stockholders who have granted proxies
to MAP IV and MAP V, and (v) certain stockholders (including Charterhouse
Equity Partners, L.P. ("CEP") and affiliates of Apollo Real Estate
Advisors, L.P.) who are party to a stockholders agreement with Andrew L.
Farkas. Includes 748,000 shares subject to options and warrants which are
or will become exercisable within 60 days. Includes 3,333 shares of
restricted stock which will vest within 60 days, the remaining 93,333
shares will vest ratably over the next 56 months.
(2) Includes securities owned by various affiliates of Apollo Real Estate
Investment Fund, L.P., including 1,392,916 shares subject to warrants which
are or will become exercisable within 60 days.
(3) Janus Capital Corporation is a registered investment advisor that furnishes
investment advice to individual and institutional clients and certain
mutual funds. The foregoing is based upon a Schedule 13G, Amendment No. 7,
filed by Janus Capital Corporation with the Securities and Exchange
Commission on or about February 13, 1998.
(4) The Capital Group Companies, Inc. ("Capital") is the parent holding company
of a group of investment management companies. Capital does not have
investment power or voting power over any of the securities reported
herein. Capital Guardian Trust Company, a bank as defined in Section 3(a)6
of the Securities Exchange Act of 1934 and a wholly owned subsidiary of
Capital, is the beneficial owner of the reported shares as a result of
serving as the investment manager of various institutional accounts. The
reported shares include 424,530 shares resulting from the assumed
conversion of 225,000 shares of the 6 1/2% Trust Convertible Preferred
Securities issued by Insignia Financing I, a subsidiary of the Company. The
foregoing is based upon a Schedule 13G filed by Capital with the Securities
and Exchange Commission on or about February 10, 1998.
Perkins Capital Management, Inc. is a registered investment advisor that
furnishes investment advice to individual and institutional clients and to
certain mutual funds. The reported shares include 1,870,000 shares and
210,000 warrants (exercisable within 60 days) owned by clients of Perkins
Capital Management, Inc. and 500,000 warrants (exercisable within 60 days)
owned by Perkins Opportunity Fund. The foregoing is based upon a Schedule
13G, Amendment No. 9, filed by Perkins Capital Management, Inc. on or about
January 30, 1998.
(5) Palisade Capital Management, L.L.C. is a registered investment advisor that
furnishes investment advice to individual and institutional clients and to
certain mutual funds. The reported shares include 683,965 shares resulting
from the assumed conversion of 362,501 shares of the 6 1/2% Trust
Convertible Preferred Securities issued by Insignia Financing I, a
subsidiary of the Company. The foregoing is based upon a Schedule 13G filed
by Palisade Capital Management, L.L.C. on or about February 9, 1998.
(6) Messrs. Denison, Lipstein, Mickel and Robin L. Farkas are each limited
partners in MAP IV.
(7) Includes 133,600 shares held by First Security Associates L.P., a limited
partnership of which Mr. Denison is the sole general partner, and 246,100
shares held by First Security Company II, L.P., a limited partnership of
which Mr. Denison is the sole general partner. Includes 10,000 shares
subject to options and warrants which are exercisable or will become
exercisable within 60 days, but excludes 43,600 shares held by First
Security International Fund, Ltd., a Cayman Islands company, for which
First Security Management, Inc., a New York corporation, serves as the
investment advisor. Mr. Denison is the President of First Security
Management, Inc.
(8) Includes 24,000 shares subject to options which are or will become
exercisable within 60 days, and 88,129 shares owned by a general
partnership for which Mr. Farkas shares voting power.
(9) Includes 24,000 shares subject to options which are or will become
exercisable within 60 days. Does not include 675,838 shares beneficially
owned by CEP and an associated entity. Charterhouse Group International,
Inc. ("Charterhouse"), of which Mr. Halpern is Chairman of the Board,
indirectly controls CEP and may be deemed to beneficially own such shares.
Mr. Halpern disclaims beneficial ownership of any shares beneficially owned
by Charterhouse.
(10) Includes 24,000 shares subject to options which are or will become
exercisable within 60 days.
(11) Includes 233,000 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 834 shares of restricted stock
which will vest within 60 days and the remaining 23,333 shares vest ratably
over the next 56 months.
12) Includes 176,500 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 834 shares of restricted stock
which will vest within 60 days and the remaining 23,333 shares vest ratably
over the next 56 months.
(13) Includes 100,000 shares subject to options which are or will become
exercisable within 60 days.
(14) Includes 171,680 shares subject to options which are or will become
exercisable within 60 days.
(15) Includes 2,353,900 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 5,835 shares of restricted
stock which will vest within 60 days and the remaining 163,332 shares will
vest ratably over the next 56 months.
(16) No directors or executive officers beneficially own any of the outstanding
6 1/2% Trust Convertible Preferred Securities issued by Insignia Financing
I, a subsidiary of the Company.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Reistrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSIGNIA FINANCIAL GROUP, INC.
By: /s/Ronald Uretta
---------------------
Ronald uretta
Chief Operating Officer
