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 March 31, 1998
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 March 31, 1998, there were outstanding 31,270,025 shares of Class A Common
Stock.
<PAGE>
INSIGNIA FINANCIAL GROUP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
Page No.
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
for the three monthsended March 31, 1998 and 1997 2
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Cash Flow
for the three months ended March 31, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<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
March 31,
1998 1997
Revenues
<S> <C> <C>
Fee based services $126,762 $65,066
Interest 1,342 734
Other 583 529
Apartment property 1,771 1,583
130,458 67,912
Costs and Expenses
Fee based services 104,810 51,717
Administrative 3,896 2,282
Apartment property 890 732
Interest 4,072 1,633
Apartment property interest 406 372
Depreciation and amortization 10,010 7,086
Apartment property depreciation 271 239
Merger related expenses 2,036 --
126,391 64,061
Equity earnings - limited partnership interests 3,193 3,067
Minority interests in consolidated subsidiaries (3,774) (3,578)
Income before income taxes 3,486 3,340
Provision for income taxes 1,569 1,336
Net income $ 1,917 $ 2,004
Per share amounts - basic: $.06 $.07
Per share amounts - assuming dilution: $.06 $.06
Weighted average common shares and assumed
conversions 32,893,848 31,550,390
<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>
March 31, December 31,
1998 1997
(Unaudited) (Note)
Assets
<S> <C> <C>
Cash and cash equivalents $ 73,143 $ 88,847
Receivables 151,919 122,180
Property and equipment 20,836 19,011
Investments in real estate limited partnerships
and other securities 238,673 215,735
Apartment property 26,003 22,357
Property management contracts 141,604 147,256
Costs in excess of net assets of acquired
businesses 230,118 158,524
Other assets 40,514 26,313
Total assets $922,810 $800,223
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 17,347 $ 13,705
Commissions payable 56,404 51,285
Accrued and sundry liabilities 114,524 102,009
Notes payable 236,465 170,404
Non-recourse mortgage note payable 21,957 19,300
Total liabilities 446,697 356,703
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 144,137 144,065
Minority interests in consolidated subsidiaries 65,082 61,546
Stockholders' Equity:
Common stock, class A, par value $.01 per share -
authorized 100,000,000 shares, issued and
outstanding 31,270,025 (1998) and 30,159,161
(1997) shares, 166,400 shares held in treasur
(1998 and 1997) 313 302
Additional paid-in capital 228,648 201,597
Retained earnings 37,933 36,010
Total stockholders' equity 266,894 237,909
Total liabilities and stockholders' equity $922,810 $800,223
<FN>
NOTE:The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
c) Statement of Cash Flow
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
Operating Activities
<S> <C> <C>
Net income $ 1,917 $ 2,004
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 10,010 7,086
Apartment property depreciation 271 239
Equity in earnings of partnerships (3,193) (3,067)
Minority interests in consolidated subsidiaries 3,774 3,578
Foreign currency translation 6 --
Changes in operating assets and liabilities:
Accounts receivable (9,318) (4,478)
Other assets (6,519) (1,258)
Accrued compensation (13,555) (6,647)
Accounts payable and accrued expenses (7,110) (173)
Commissions payable 2,452 (472)
Net cash (used in) operating activities (21,265) (3,188)
Investing activities
Additions to property and equipment, net (1,538) (772)
Payments made for acquisition of management contracts
and acquired businesses (27,159) (2,990)
Proceeds from Balcor dispositions 196 2,149
Purchase of real estate limited partnership interests (23,623) (1,698)
Distributions from partnerships 6,497 28,329
Advances made under note agreements (4,394) (2,886)
Collections on notes receivable 604 375
Net cash (used in) provided by investing activities (49,417) 22,507
Financing activities
Proceeds from issuance of common stock of subsidiary -- 110
Payments on notes payable (1,530) (445)
Payment of dividends on trust based convertible
preferred securities (2,510) (2,429)
Proceeds from exercise of stock options and warrants 3,678 1,185
Proceeds from notes payable 56,840 --
Distributions made to minority interests (1,500) (1,581)
Debt and stock issuance costs -- (952)
Net cash provided by (used in) financing activities 54,978 (4,112)
Increase in cash and cash equivalents (15,704) 15,207
Cash and cash equivalents at beginning of period 88,847 54,614
Cash and cash equivalents at end of period $73,143 $ 69,821
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Insignia Financial Group, Inc. (the "Company" or "Insignia") is a Delaware
corporation incorporated in July 1990. The Company is a fully integrated
real estate 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 month period ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
3. In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirement.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
(Thousands of Dollars,
except share data)
Basic
<S> <C> <C>
Average common shares outstanding 30,615 28,967
Assumed conversions -- --
Total 30,615 28,967
Net income $ 1,917 $ 2,004
Preferred dividends -- --
Adjusted net income $ 1,917 $ 2,004
Per share amounts - basic $.06 $.07
Diluted
Average common shares outstanding 30,615 28,967
Assumed conversions 2,279 2,583
Total 32,894 31,550
Net income $ 1,917 $ 2,004
Preferred dividends -- --
Adjusted net income $ 1,917 $ 2,004
Per share amounts - diluted $.06 $.06
<FN>
4. In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income ("Statement 130"). As of January 1, 1998,
the Company adopted Statement 130. Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
translation adjustments, reported separately in shareholders' equity to be
included in other comprehensive income. Total comprehensive income for each
of the three month periods ended March 31, 1998 and 1997 was immaterial.
</FN>
</TABLE>
<PAGE>
5. In 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"),
which is effective for financial statements for fiscal years beginning
after December 15, 1998. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application should
be reported as the cumulative effect of a change in accounting principle
and expensed in the first quarter in the year of adoption. At March 31,
1998, the Company had approximately $1.4 million capitalized as
organizational costs that would be affected by the requirements of SOP
98-5.
6. The following is a summary of the Company's material contingencies as of
March 31, 1998:
1996 Tender Offer Litigation.
In May 1996, Walton Street Capital Acquisition II, LLC ("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. Plaintiffs perfected their appeal, which was
argued in March 1998. The appellate court has not yet rendered its decision
on the appeal.
United States Department of Housing and Urban Development
On or about May 8, 1997, the United States Department of Housing and Urban
Development ("HUD") 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.
On August 13, 1997, the Company entered into an agreement with HUD which
resolved any claims which HUD could have made against the Company arising
out of the allegations in the complaint against AFC and Rozet. 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 its
actions were proper. Although the Company believes it acted properly, it
agreed to resolve the matter expeditiously to avoid potential complex,
costly and disruptive litigation. In connection with the agreement, the
Company paid the Government the sum of $5 million and recorded a one-time
charge of $5 million (pre-tax) for its third quarter ended September 30,
1997.
In addition, the Company agreed with HUD that it could make voluntary
disclosures to the Government concerning other conduct arising out of or
relating to its management of HUD-related properties. On or about October
13, 1997, the Company provided additional information to the Government.
The Company recorded total charges aggregating $10.2 million in 1997 for
costs incurred and accrued in relation to its management of HUD properties.
At December 31, 1997, the Company had $4.0 million included in accrued and
sundry liabilities associated with its management of such properties.
In December 1997, AFC and a number of affiliates made a motion to implead
the Company as a third party defendant. In the proposed third party
compliant, AFC and affiliates alleged a number of claims sounding
principally in indemnification. The Government filed an opposition to that
motion. On February 3, 1998, the Court denied AFC's motion to implead. On
March 11, 1998, the Company and HUD resolved all remaining issues for a
payment of $2.5 million.
1998 Litigation
On March 24, 1998, certain persons claiming to own limited partner
interests in certain limited partnerships whose general partners (the
"General Partners") are affiliates of Insignia (the "Partnerships") filed a
purported class and derivative action in California Superior Court in the
County of San Mateo against Insignia, the General Partners, AIMCO, certain
persons and entities who purportedly formerly controlled the General
Partners, and additional entities affiliated with individuals who are
officers, directors and/or principals of several of the defendants. The
complaint contains allegations that, among other things, (i) the defendants
breached their fiduciary duties to the plaintiffs by selling or agreeing to
sell their "fiduciary positions" as stockholders, officers and directors of
the General Partners for a profit and retaining said profit rather than
distributing it to the plaintiffs; (ii) the defendants breached their
fiduciary duties by mismanaging the Partnerships and misappropriating the
assets of the Partnerships by (a) manipulating the operations of the
Partnerships to depress the trading price of limited partnership units (the
"Units") of the Partnerships; (b) coercing and fraudulently inducing
unitholders to sell Units to certain of the defendants at depressed prices;
and (c) using the voting control obtained by purchasing Units at depressed
prices to entrench certain of the defendants' positions of control over the
Partnerships; and (iii) the defendants breached their fiduciary duties to
the plaintiffs by (a) selling assets of the Partnerships such as mailing
lists of unitholders; and (b) causing the General Partners to enter into
exclusive arrangements with their affiliates to sell goods and services to
the partnerships, the unitholders and tenants of Partnership properties.
The complaint also alleges that the foregoing allegations constitute
violations of various California securities, corporate and partnership
statutes, as well as conversion and common law fraud. The complaint seeks
unspecified compensatory and punitive damages, an injunction blocking the
sale of control of the General Partners to AIMCO and a court order
directing the defendants to discharge their fiduciary duties to the
plaintiffs. The defendants have not served or filed a reply to the
complaint. Insignia believes the suit to be without merit and intends to
defend the suit vigorously.
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.
7. Acquisitions
Richard Ellis Group Limited Acquisition
In February 1998, the shareholders of Richard Ellis Group Limited ("RE")
accepted the Company's offer to acquire 100% of the stock of RE. RE is a
real estate services and investment firm located in the United Kingdom. The
purchase price is valued at approximately $81.5 million of which $14.7
million is contingent on future performance measures. The transaction was
completed on February 26, 1998. The Company funded the acquisition by
borrowing approximately $35 million from its revolving credit facility,
issuing 617,371 shares of its Class A Common Stock, and assuming existing
options which will enable RE employees to purchase 853,741 shares of the
Company's Class A Common Stock.
8. Merger and 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 throughout the US, RE in the UK and Insignia/CAGISA in
Italy; Insignia Residential Group, Inc., a New York based cooperative and
condominium management company; Realty One, the nations ninth largest
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 $149.5 million (liquidation
value) 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 million 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 received 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 Insignia Properties Trust, a majority owned subsidiary of the Company
("IPT"), at a price of at least $13.25 per IPT share. IPT is a 75% owned
subsidiary of the Company; the 25% interest of IPT not owned by the Company
is valued at an aggregate of approximately $100 million, assuming a value
of $13.25 per share.
As a condition to execution of the Merger Agreement, certain of 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 under options and
warrants to the extent exercisable (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.
9. Trust Based Convertible Preferred Securities
On May 4, 1998, the Company approved, contingent upon the completion of the
spin-off distribution to its shareholders of all of the outstanding stock
of Insignia/ESG Holdings, Inc. ("Holdings"), a special distribution of
warrants to purchase common shares in Holdings (the "Warrant Distribution")
to the holders of 6.5% Trust Convertible Preferred Securities ("Preferred
Shares") issued by a subsidiary, Insignia Financing I. The Warrant
Distribution will be contingent upon both the completion of the Holdings
Distribution, which is in turn contingent upon approval of the shareholders
of IFS and other conditions, and the determination by Insignia's board that
all of the conditions to Insignia's merger with AIMCO have been satisfied
in their entirety such that the closing of the merger is imminent.
The proposed Warrant Distribution would consist of six warrants for each
ten Preferred Shares assuming a distribution of one share of Holdings
common stock for each share of IFS common stock. Each Preferred Share has a
$50 liquidation preference. The number of warrants to be distributed would
be further adjusted by the Holdings Distribution ratio. For example, if two
shares of Holdings were distributed for each three shares of IFS, a holder
of ten Preferred Shares would receive four warrants to purchase common
shares in Holdings. The warrants would have a five-year term from the date
of the Holdings Distribution and would be exercisable at a price equal to
120% of the average closing price of Holdings' common stock for the first
five trading days following the Holdings Distribution. There are currently
2,990,000 Preferred Shares outstanding.
Under the terms of the merger agreement with AIMCO, the Preferred Shares
would become an obligation of AIMCO and would become convertible into AIMCO
securities, as Insignia Financing I would become a subsidiary of AIMCO.
Pursuant to the trust indenture governing the Preferred Shares, prescribed
adjustments to the conversion price would occur both as a result of the
Holdings Distribution and as a result of the merger.
10. Other Matters
On July 18, 1997, IPT, Insignia, MAE GP corporation (which at the time was
a affiliate of IPT but has subsequently been merged into IPT) ("MAE GP"),
and Angeles Mortgage Investment Trust, an unincorporated California
business trust ("AMIT") entered into a definitive merger agreement pursuant
to which AMIT is to be merged with and into IPT, with IPT being the
surviving entity, in a stock for stock transaction (the "AMIT Merger").
AMIT is a public company whose Class A Shares trade on the American Stock
Exchange under the symbol ANM. Insignia and its affiliates currently own
96,800 (or approximately 3.7%) of the 2,617,000 outstanding AMIT Class A
shares and all of the 1,675,113 outstanding AMIT Class B shares. If the
AMIT Merger is consummated, IPT will become a publicly traded company (IPT
presently intends to apply for listing of its shares on the American Stock
Exchange, which listing would be subject to completion of the AMIT Merger),
and it is anticipated that Insignia and its affiliates will own
approximately 57% of post-merger IPT. The former AMIT shareholders (other
than Insignia and its affiliates) will own approximately 17% of post-merger
IPT, and the current unaffiliated shareholders of IPT will own the
remaining 25% of post-merger IPT to which AIMCO will be making an offer to
purchase (see merger and spin-off above). The AMIT Merger is expected to be
completed in the second quarter of 1998. However, consummation of the AMIT
Merger is subject to several conditions, including approval of the AMIT
Merger Agreement and the AMIT Merger by the shareholders of AMIT.
Accordingly, there can be no assurance as to when the AMIT Merger will
occur, or that it will occur at all.
11. During the three months ended March 31, 1998, the Company had the following
changes in the equity accounts:
a) Exercise of 403,493 stock options and 90,000 warrants representing
493,493 shares of Class A Common Stock at exercise prices ranging from
$1.88 to $17.50 per share.
b) Net income of $1,917,000 for the three months ended March 31, 1998.
c) Accrued compensation of $517,677 relating to restricted stock awards.
d) Issuance of 617,371 shares at $21.12 with regard to the RE
acquisition.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets grew from $800.2 million at December 31, 1997 to $922.8 million at
March 31, 1998, primarily from the completed acquisition of the RE Group Limited
and investments in real estate ownership. The significant assets acquired in the
RE transaction were approximately $15.8 million in receivables, $68.3 million in
goodwill, and $7.5 million in other assets.
Cash and cash equivalents decreased approximately $15.7 million due
primarily to the payment of year-end accruals, primarily incentive compensation.
In addition to receivables acquired in the RE transaction of $15.8 million,
the residential mortgage operation had a $5.1 million increase due to loans held
for sale not yet sold. First quarter activity was above normal in sales
transactions and loan originations due to the active real estate market.
Property management contracts decreased by $5.7 million as a result of the
amortization of contract bases, net of additions for the completed acquisitions
of Goldie Wolfe and Cohen Financial.
Investments in real estate limited partnerships and other securities
increased by $22.9 million due primarily to the purchase of approximately $23.6
million in limited partnership interests and development properties. These
investments generated equity earnings of $3.2 million and distributions totaling
approximately $6.5 million in aggregate during the quarter.
The increase of $12.5 million in accrued and sundry is primarily a result
of the addition of $22.5 million in accruals related to the RE transaction net
of the payment of year-end incentive compensation accruals of approximately $17
million.
Additional paid in capital increased $27.1 million as a result of the
exercise of stock options and warrants, and the issuance of stock and assumption
of options with regard to the RE transaction.
Results of Operations
The Company posted strong increases in revenues ($62.5 million increase to
$130.5 million), Net EBITDA ($4.0 million increase to $18.4 million) and a small
decrease to Net Income ($87,000 decrease to $1.9 million). These results are
primarily attributable to the acquisition activity over the past year as well as
the strong commercial real estate and related real estate services market. The
Company uses Net EBITDA as a primary indicator of financial performance, which
increased 28% for the quarter over the same quarter last year from $14.4 million
for March 31, 1997 to $18.4 million for March 31, 1998. 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. Included in Net EBITDA are merger-related
expenses of $2 million incurred in connection with the spin-off and merger.
Net EBITDA per share increased 22% from $0.46 per share for the quarter
ended March 31, 1997 to $0.56 per share for the quarter ended March 31, 1998.
The pro rata increase in per share data from increases in Net EBITDA results was
offset by the increase in the weighted average common stock equivalents, as
calculated by FAS 128. All prior period per share amounts have been restated
giving effect for the new pronouncement.
Revenues increased 92% to $130.5 million for 1998 from $67.9 million for
1997; primarily attributable to the fee based services revenues from
acquisitions that closed during 1997 and the first quarter of 1998. The
acquisitions of Realty One; Barnes, Morris, Pardoe and Foster; and the
acquisition of 100% of the Class B stock of First Winthrop Corporation along
with a general partnership interest in Winthrop Financial Associates contributed
for a full quarter while the RE transaction contributed for a partial quarter.
Two items of note in the first quarter's results are Realty One and RE. The
first item is the results of the residential brokerage operation. Realty One
(like most of the residential brokerage industry) experiences significant
seasonality, with the first quarter results typically being the lowest. While
Realty One contributed negatively to Net EBITDA by $512,000 for the quarter, the
results exceeded expectations due to a mild winter and strong single family home
sales. The second item is the UK business conducted by RE, which contributed
approximately a full quarter's estimated Net EBITDA of $1.4 million for the
partial quarter it was owned.
Interest income increased 83% from 1997 to 1998, primarily from the
increase in cash balances maintained by Insignia Properties Trust. Cash and cash
equivalents included $23.3 million of Insignia Properties Trust at March 31,
1998 compared to $5.1 million at March 31, 1997.
Fee based expenses increased 103% over the first quarter of 1997, primarily
from the increased revenues resulting from the acquisitions completed as
mentioned above.
Administrative expenses increased 71% due to the effects of operating
satellite offices for three of the recent acquisitions. With the Realty One
acquisition, the Barnes, Morris acquisition and the RE acquisition, additional
administrative and support functions were required to continue the smooth
operation of those business units. In time, as additional consolidations are
made in the respective fields represented by these acquisitions, efficiencies
are expected to be gained and the growth in administrative expenses is expected
to slow.
Interest expense increased 149% as a result of higher outstanding balances
on Insignia's revolving credit facility. The increased borrowings were used to
complete acquisitions.
Depreciation and amortization increased 41% primarily as a result of the
increase in amortizable assets acquired in the transactions completed during
1997 and the first quarter of 1998.
Merger related expenses are in connection with the spin-off of the Company
and the merger of the remaining residential operations with AIMCO. The first
quarter amounts represent professional fees to third parties Additional
professional fees as well as some employee severance or similar costs will be
incurred during the second and third quarters.
The provision for income taxes increased 17% primarily as a result of the
effective tax rate increasing from 40% for 1997 to 45% for 1998 due to an
increase in non-deductible permanent differences, such as merger-related
expenses.
As a result of the foregoing, net income decreased slightly from $2.0
million for the three months ended March 31, 1997 to $1.9 million for the three
months ended March 31, 1998, with diluted earnings per share remaining the same
for both quarters at $0.06 per share.
<PAGE>
Liquidity and Capital Resources
The Company has several sources available for capital, including cash flows
from operations, distributions and dividends from IPT and co-investment
partnerships, and available credit under the $275 million revolving credit
facility. At March 31, 1998, $200 million was outstanding under this facility.
The Company uses Net EBITDA as an indicator of its working capital generated
from operations. Net EBITDA (including the merger-related expenses) increased
28% to $18.4 million. The following chart specifically identifies the sources of
Net EBITDA and how the numbers are derived.
<TABLE>
<CAPTION>
For the Quarter Ended
March 31,
1998 1997
(Thousands of dollars)
<S> <C> <C> <C>
Service EBITDA(1) $17,634 $12,330
FFO
Insignia Properties Trust 5,582 5,179
Co-investments and Other 1,739 928
Total FFO 7,321 6,107
Combined EBITDA and FFO(1) 24,955 18,437
Interest expense (4,072) (1,633)
Trust based preferred dividends (2,510) (2,429)
Net EBITDA(1) $18,373 $14,375
</TABLE>
<PAGE>
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. With regards to the spin-off, the following
table shows the Gross EBITDA (before allocations for corporate administration
and support) by business unit. The merger agreement calls for AIMCO to assume
approximately $308 million in debt and other liabilities. The results detailed
below show the business units as defined by the spin-off transaction and the
merger agreement. The spin-off entity will be negotiating its own credit
facility as well as future capital markets transactions necessary to fund its
ongoing acquisition activity.
<TABLE>
<CAPTION>
For the Quarter Ended
March 31,
1998 1997
(Thousands of dollars)
Gross EBITDA contribution: (2)
<S> <C> <C>
Insignia/ESG businesses expected to be spun off $12,153 $ 5,997
Other businesses expected to merge with AIMCO 12,377 9,747
24,530 15,744
FFO contribution:
Commercial co-investments expected to be spun off 366 156
Residential co-investments expected to merge
with AIMCO 487 772
Winthrop LP investments expected to merge with AIMCO 886 --
IPT investments expected to merge with AIMCO 5,582 5,179
7,321 6,107
Gross EBITDA and FFO 31,851 21,851
Less:
Common administration and support (4,860) (3,414)
Merger-related expenses (2,036) --
Interest expense(3) (4,072) (1,633)
Preferred distributions (2,510) (2,429)
Net EBITDA $18,373 $14,375
<FN>
(1) Includes merger related expenses of $2,036,000.
(2) Gross EBITDA does not include allocated corporate overhead.
(3) Includes interest of $382,000 in 1998 from Insignia/ESG subsidiaries.
</FN>
</TABLE>
<PAGE>
Subsequent Events
On May 11, 1998 the Company announced that it had acquired Hotel Partners
("HP"), a leading brokerage firm focused exclusively on the hospitality segment
of the real estate industry. The purchase price was approximately $7 million
paid in cash at closing and potential additional consideration contingent upon
the performance of such unit over a five year period. Hotel Partners will
operate as an integral part of Insignia/ESG's Capital Advisors Group, which
focuses on investment sales and debt placement internationally. During 1997, HP
was responsible for the sale of 115 hotel, motel and resort properties ranging
in price from $150 million to $550,000. HP, based in Chicago, has seven
additional full-service offices in the US (New York, Los Angeles, Dallas, Miami,
Atlanta, Honolulu and Boston) and also overseas (London, Frankfurt, Tokyo,
Singapore and Hong Kong). This acquisition will expand opportunities in the
Capital Advisors Group with its international ties working in connection with
the RE operations.
YEAR 2000
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.
Other
Certain items discussed in this quarterly 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 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 6 in Notes to Condensed Consolidated Financial Statements, Part I,
Item 1, of Form 10-Q for March 31, 1998 for the details on outstanding issues.
Also, see Registrants' Annual Report on Form 10-K for the year ended December
31, 1997.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial Data Schedule for March 31, 1998.
b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
March 31, 1998:
1. Form 8-K dated December 4, 1997 and filed January 14, 1998
disclosing Registrants' announcement of acquisition of Fresh
Meadows with The Witkoff Group.
2. Form 8-K dated January 7, 1998 and filed January 22, 1998
disclosing Registrants' agreement with Cohen Financial to assume
rights to perform property management, leasing, and construction
supervision services for approximately 4.1 million square feet of
commercial real estate located primarily in the Chicago area.
3. Form 8-K dated February 25, 1998 and filed March 23, 1998
disclosing Registrants' announcement of the completed acquisition
of 100% of the stock of RE Group Limited.
4. Form 8-K/A dated February 25, 1998 and filed April 1, 1998
disclosing Registrants' sales of equity securities pursuant to
Regulation S in connection with the RE acquisition.
<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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. March 31, 1998 Form 10-Q and is qualified in
its entirety by reference to such 10-Q filing.
</LEGEND>
<CIK> 0000870480
<NAME> Insignia Financial Group, Inc.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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144,137
0
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</TABLE>
