UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{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 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. 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. {X}
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
Proxy Statement for the Annual Meeting of Stockholders in Part III of this Form
10-K.
<PAGE>
Part I
Item 1. Business
General. 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 organization specializing in the ownership and
operation of securitized real estate assets. As the largest manager of
multifamily residential properties in the United States and one of the largest
managers of commercial properties, 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, including approximately 900 limited partnerships having approximately
350,000 limited partners. Insignia commenced operations in December 1990 and
since then has grown to provide property and/or asset management services for
over 2,700 properties, which include approximately 280,000 residential units
(including cooperative and condominium units) and approximately 160 million
square feet of commercial space, located in over 500 cities in 48 states, Italy
and the United Kingdom.
Insignia's principal business strategy is to expand its real estate
services business in four primary ways. First, the Company seeks to acquire, or
to have an affiliate acquire, controlling positions in entities that own or
control real estate properties, and then, subject to their fiduciary duties to
such entities, engage Insignia to provide management services. Second, Insignia
seeks to enter into special contractual relationships with non-affiliated third
parties that own or control portfolios of real estate properties pursuant to
which Insignia will provide management services to some or all of the properties
within their portfolios. Third, the Company seeks to expand its management of
properties which are owned by non-affiliated third parties, such as large
insurance companies, banks, government or quasi-government agencies, and other
institutional investors and lenders. Fourth, Insignia seeks to make
opportunistic real estate investments in controlled entities, primarily through
Insignia Properties Trust ("IPT"), a majority owned real estate investment trust
("REIT") subsidiary of the Company, or through institutional co-investments for
both real estate cash flows and profits and additional service revenues.
Real Estate Interests. Insignia's real estate interests consist primarily
of limited partner interests in controlled partnerships which own real estate
properties ranging from residential apartment complexes to commercial office,
retail, and industrial parks. Insignia began making such investments in December
1994 in connection with the ConCap acquisition, and has since acquired
additional interests through tender offers, the National Properties Investors,
Inc. ("NPI") acquisition in January 1996, negotiated block purchases, secondary
market purchases and co-investment ventures with institutional partners. In
addition, in October 1997, the Company acquired an interest in First Winthrop
Corporation, together with a substantial investment in limited partner
interests.
Acquisitions. Insignia completed the acquisition of ten property management
and brokerage companies during 1997. These acquisitions 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. and affiliated companies,
100% of the Class B stock of First Winthrop Corporation and a general
partnership interest in Winthrop Financial Associates ("Winthrop"), Barnes,
Morris, Pardoe & Foster, and expansion internationally through the purchase of
60% of the stock in Compagnia di Amministrazione e Gestioni Immobiliare S.p.A.
("CAGISA"). CAGISA is one of the leading property management companies in Italy
with management of approximately 10,000 units of mostly residential housing,
primarily in Rome and Milan.
The aggregate purchase price paid for these businesses, including CAGISA,
was approximately $136.7 million paid from cash on hand of $101.6 million ($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 acquisition liabilities
and deferred taxes.
On February 26, 1998, the Company completed the acquisition of 100% of the
stock of Richard Ellis Group Limited ("Richard Ellis"). Richard Ellis is a real
estate services firm located in the United Kingdom. The purchase price paid for
Richard Ellis was approximately $81.5 million, including $24 million of the
Company's Class A Common Stock and existing stock options, $14.7 million in
contingencies based on future performance measures and the balance in cash.
Angeles Mortgage Investment Trust Merger. On July 18, 1997, IPT entered
into a definitive merger agreement to merge with Angeles Mortgage Investment
Trust ("AMIT"). The definitive agreement provides that each AMIT Class A share
will be exchanged for 1.625 IPT common shares. The exchange ratios will be
appropriately adjusted based on the respective amounts of per-share dividends
declared or paid by AMIT since January 1, 1997 and by IPT since January 31,
1997. The proposed transaction is contingent upon, among other conditions,
AMIT's receipt of a fairness opinion and the approval of the proposed
transaction by certain governmental authorities and by the shareholders of AMIT.
Stock Repurchase. The Board of Directors of the Company approved the
repurchase of outstanding Class A Common Stock of the Company in amounts up to
$50 million. On July 18, 1997, the Company obtained the approval of its
requisite lenders to amend its revolving credit facility to permit such
repurchases. At December 31, 1997, 166,400 shares of the Company's Class A
Common Stock, aggregating approximately $3.3 million, have been repurchased.
Purchase of Limited Partner Interests. On June 17, 1997, the Company
completed, for $15.5 million in cash, the purchase of limited partner interests
in partnerships controlled by IPT. Certain of those interests, aggregating
approximately $12.6 million, were contributed to IPT, effective June 30, 1997,
for common stock of IPT. The remaining $2.9 million was contributed to IPT,
effective December 31, 1997, for limited partnership units in Insignia
Properties, L.P. ("IPLP"), the controlled operating partnership of IPT.
Private Placement. During the second and third quarters of 1997, IPT sold
$52 million of its common stock of IPT shares through a private placement
offering. In the fourth quarter of 1997, IPT sold an additional $10 million of
its common shares in an unrelated private placement transaction. All such
amounts are reflected in minority interests on Insignia's consolidated balance
sheet at December 31, 1997.
Stock Repricing and Related Amendments. On April 18, 1997, Insignia
approved the repricing of certain employee stock options issued during 1996. The
274,900 options involved were issued primarily to new employees joining the
Company through acquisitions. The Company believes that this repricing is
important to its employee retention and incentive programs. The repriced options
have an exercise price of $17.50 per share over the five year vesting period,
compared to a weighted average exercise price of $23.65 prior to repricing. On
April 30, 1997, the Company's stockholders approved amendments to the
Certificate of Incorporation, as previously amended, authorizing 50 million
additional shares of the Company's Class A Common Stock and to the 1992 Stock
Incentive Plan increasing the aggregate number of shares of Common Stock
authorized for grant of awards from 4,666,666 to 5,250,000.
Amended and Restated Credit Agreement. In the first quarter of 1997, the
Company completed an amendment to its revolving credit facility, increasing the
credit limit from $200 million to $275 million. The amended revolving credit
facility involves a syndicate of 15 national and international financial
institutions. At December 31, 1997, the Company had $144 million outstanding
under the credit facility.
Reorganization of Operations. In January 1997, Insignia reorganized its
operations from six units to four units to achieve greater operating
efficiencies and separate its real estate investment activities. Insignia's
operating units now include Insignia Residential Group ("IRG"), Insignia/ESG,
Inc. ("Insignia/ESG"), Insignia Financial Services ("IFS") and Insignia
Properties Trust ("IPT"), through which the Company performs its various
services. IRG and Insignia/ESG provide management, consulting, brokerage,
investment and related services for residential and commercial properties,
respectively. IFS provides financial services including real estate investment
banking and co-investment.
Formation of IPT. During 1996, the Company formed IPT for the purpose of
acquiring and owning interests in multifamily residential and commercial
properties, including limited and general partner interests in partnerships
which hold such real estate properties. IPT has been organized in a manner that
will allow it to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986. The Company and certain of its affiliates have
transferred to IPT equity interests in entities comprising or controlling the
general partners of certain public real estate limited partnerships in exchange
for shares of beneficial interest of IPT.
IPT is the sole general partner of Insignia Properties L.P. ("IPLP"), which
functions as the operating partnership of IPT. The Company has transferred to
IPLP certain of its limited partner interests in real estate limited
partnerships (or equity interests in entities which own such interests) in
exchange for units of limited partner interest in IPLP, which units are
redeemable for cash (subject, however, to a first right of IPT to acquire any
such units for which redemption is sought in exchange for common shares of IPT).
As a result of these transactions, the Company held a 76% fully-diluted
ownership interest in the combined IPT entity at December 31, 1997.
Trust Based Convertible Preferred Securities. In November 1996, Insignia
Financing I, a Delaware trust and a consolidated subsidiary of the Company (the
"Trust"), issued and sold 2,990,000 shares of Trust Based Convertible Preferred
Securities (the "Securities") with an aggregate liquidation amount of $149.5
million, sold pursuant to exemptions under the Securities Act of 1933, as
amended, and the rules thereunder. All of the outstanding common securities of
the Trust are owned by the Company. The sole assets of the Trust are the $154.1
million principal amount of 6.5% convertible subordinated debentures of the
Company due September 30, 2016. The Company has certain obligations relating to
the Securities which amount to a full and unconditional guarantee of the Trust's
obligations under the Securities. The debentures issued by the Trust and the
common securities of the Trust purchased by the Company are eliminated in the
balance sheet. The Securities are entitled to distributions at the rate per
annum of 6.5% of the stated liquidation amount, with quarterly distributions
payable in arrears. The Company has the option to defer distributions from time
to time, not to exceed 20 consecutive quarters. The Company has made
distributions of approximately $10.0 million for the year ended December 31,
1997, which are reflected in minority interests in the consolidated statement of
income. The Securities are convertible into the Company's Class A Common Stock
at $26.50 per share through September 30, 2016, or upon the Company's option to
redeem the Securities after November 1, 1999. The Securities are structured such
that the distributions are tax deductible to the Company.
<PAGE>
<TABLE>
Acquisition History. Insignia and its affiliates have acquired control of,
or management rights to, 43 portfolios of properties since 1990. The Company
believes that there are a significant number of other portfolios which may be
available for future acquisitions. However, there can be no assurance that the
closing of any such potential acquisitions will be consummated. The following
table summarizes the portfolio acquisitions completed in 1997, 1996 and 1995
only, and their size in residential units and commercial square feet.
<CAPTION>
Commercial
Residential Units Square Feet (in thousands)
------------------------------- ---------------------------------
Contractually Third Contractually Third
Year Affiliated Restricted Party Affiliated Restricted Party
of Proper- Proper- Proper- Proper- Proper- Proper-
Acquisition Portfolio Name ties(2) ties(3) ties(4) ties(2) ties(3) ties(4)
<S> <C> <C>
1997 Barnes Morris ................... 9,000
1997 Winthrop ........................ 16,500
1997 Realty One
1997 CAGISA .......................... 10,000
1997 Forum ........................... 2,400
1997 Radius Retail Advisors, Inc. .... 1,231
1997 Related Companies of Florida .... 10,370
1997 Frain, Camins & Swartchild, Inc. 4,930
1997 HMB Property Services, Inc. ..... 1,078
1997 Rostenberg-Doern Company, Inc. .. 1,289
1996 GSSW(1) ......................... 6,161
1996 Edward S. Gordon Company, Inc. .. 25,500
1996 Paragon ......................... 21,800
1996 National Property Investors, Inc. 34,265 3,735 3,885
1995 Propsys/Compass Ventures ........ 565 138
1995 Douglas Elliman-Gibbons & ....... 54,301
Ives/Kreisel Company, Inc.
1995 Gleichman & Company, Inc. ....... 1,500
1995 O'Donnell Property Services ..... 3,496 20,102
</TABLE>
(1) The GSSW acquisition added additional affiliated management contracts as
well as the general partner interest on third party properties acquired in
1994.
(2) Affiliated properties are ones in which some form of general partner
interest or other control mechanism resides with the Company or an
affiliate.
(3) Contractually restricted properties are ones in which the general partner
interest has not been relinquished to Insignia or an affiliate, but ones in
which restrictions and protection clauses have been put in the management
agreements to strengthen the stability of the relationship.
(4) Third party properties are ones in which no control exists, and the
contracts on the properties are cancelable at the option of either party.
In addition, over the past 24 months the Company has co-invested, with
institutional partners, in the acquisition of 18 limited partnerships owning
residential and commercial properties. The Company's ownership percentages in
these co-investment partnerships range from 10% to 35% at December 31, 1997.
These co-investment partnerships, which are a major source of growth for
Insignia, own assets in the aggregate valued at approximately $575 million and
own 54 properties comprising 10,300 apartment units and 3.9 million square feet
of commercial space.
Services. The Company's services include property management, providing all
of the day-to-day services necessary to operate a property, whether residential
or commercial; tenant representation; corporate real estate consulting; asset
management, including long-term financial planning, monitoring and implementing
capital improvement plans, and development and execution of refinancings and
dispositions; maintenance and construction services; marketing and advertising;
investor reporting and accounting, including preparation of quarterly reports
and annual K-1 tax reporting forms for limited partners, as well as regular
reporting under the Securities Exchange Act of 1934 where applicable; investment
banking, including assistance in workouts and restructurings, mergers and
acquisitions, debt and equity securitizations, and acquisitions of limited
partner interests; and real estate brokerage.
The Company's senior management personnel have an average of over 20 years
of experience in the real estate services industry and many of the most
experienced managers joined the Company in connection with certain of its
acquisitions. The Company believes that its management expertise and
state-of-the-art computer and communications systems allow it to offer its
customized services efficiently and at a cost to the Company that permits it to
be competitive with other real estate service companies.
The U.S. Department of Housing and Urban Development ("HUD") has approved
Insignia to provide property management services for certain properties subject
to regulations by HUD. Approximately 13% of the residential units managed by the
Company were housing projects subsidized under various government programs
administered by HUD. 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.
Competition. Competition is intense in the markets for acquisition and
control of real estate entities and the rights to manage the controlled
properties, as well as for management of third-party owner properties.
Insignia's competitors for residential property management include major
organizations such as AIMCO of Denver, CO, and Lincoln Property Company of
Dallas, Texas. Competitors in the commercial property real estate business
include CB Commercial Real Estate Group of Los Angeles, California, Grubb &
Ellis Company of Chicago, Illinois, LaSalle Partners of Chicago, Illinois, and
Cushman & Wakefield of New York. Despite the large size of these and other
competitors, the industry is highly fragmented and no single organization
controls or manages more than a small percentage of the residential or
commercial properties in the United States. Most competitors are regional or
local organizations that manage a relatively small number of properties.
Insignia believes that competition for acquisition of control of real
estate entities is based principally on the ability to offer reasonable value to
the seller of control, often restructuring the debt and equity of the controlled
entity to allow the properties to provide positive cash flow to investors.
Insignia believes its financial strength, together with its ability to evaluate
and close acquisitions quickly and effectively using its in-house capabilities,
its record of successful real estate services, and its low cost structure,
provide credibility in negotiating such restructuring, and complement its
ability to offer attractive terms to the seller. Insignia believes that its
track record of having successfully completed 43 acquisitions since its
inception gives it a competitive advantage in obtaining attractive acquisitions.
Competition for third party management contracts is based principally on
quality of service, including the ability to enhance asset values, and cost.
Unlike many of its competitors, Insignia's personnel are experienced in managing
a wide variety of types of properties in locations throughout the country. This
enables Insignia to offer an owner of a large diversified portfolio the ability
to obtain experienced management for most or all of its properties through one
organization. Insignia believes it has demonstrated an ability to effectively
manage, lease, and improve the value of, both residential and commercial
properties. In addition, Insignia believes it has developed a reputation for
quality service and attention to clients, investors, and tenants alike. Insignia
also believes its economies of scale and state-of-the-art management information
system allow it to offer its services efficiently and at an overall cost which
is competitive with or less expensive than is offered by other management
service companies. However, while Insignia creates significant savings through
its substantial purchasing power, and is able to offer certain cost reimbursed
services (such as partnership administration) so that overall expenses are lower
than those of Insignia's competitors, Insignia believes its principal
competitive advantages are the experience of its management and the efficiency
and flexibility of its management information systems. As a result, Insignia
believes it has competed effectively in the market for provision of real estate
services to third party entities. This segment of the business has grown since
inception, although there can be no assurance it can continue to do so.
Affiliated Entities. Metropolitan Asset Enhancement, L.P. ("MAE") was
formed prior to 1991 to be the principal vehicle for acquiring general partner
interests in limited partnerships owning real estate and real estate related
assets that would be managed or serviced by the Company. Insignia holds a 19.1%
limited partnership interest in MAE. As of January 1, 1998 this interest was
transferred to Andrew Farkas under his amended employment agreement. Andrew L.
Farkas, the Chairman of the Board, President and Chief Executive Officer of
Insignia, owns the general partner of MAE, which has a 1% partnership interest.
In August 1993, the Company entered into an agreement with MAE whereby (i) the
Company agreed to assist MAE as its advisor and agent in connection with MAE's
acquisition, asset management, property management, and securitization
activities and in connection therewith to perform all services relating to the
foregoing, (ii) the Company agreed to render to MAE full investment banking,
financial advisory, recapitalization, asset restructuring, securitization and
mortgage banking services (as sole compensation for the provision of such
services, the Company receives certain cost reimbursements, incentive management
fees, and transaction fees as defined in such agreement), and (iii) the Company
and MAE agreed that, in the event either obtains an opportunity to acquire
interests in real estate or in entities which own or control real estate, the
Company will have the first right to acquire such interests. If the Company
elects not to acquire any such interests, but MAE does elect to acquire such
interests and the Company elects to provide any financing to MAE for such
acquisition, then such financing shall be by means of loans that will bear
interest at a rate equal to the rate then paid by the Company on indebtedness
under a revolving credit facility. If the Company is not a party to a revolving
credit facility, such rate will be the estimated rate the Company would pay on
indebtedness incurred under a revolving credit facility.
Environmental Regulation. Under various federal and state environmental
laws and regulations, a current or previous owner or operator of real estate may
be required to investigate and remediate certain hazardous or toxic substances
or petroleum product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The presence of contamination or the failure
to remediate contamination may adversely affect the owner's ability to sell or
lease real estate or to borrow using the real estate as collateral. The owner or
operator of a site may be liable under common law to third parties for damages
and injuries resulting from environmental contamination emanating from the site.
There can be no assurance that Insignia, or any assets owned or controlled by
Insignia, currently are in compliance with all of such laws and regulations, or
that Insignia will not become subject to liabilities that arise in whole or in
part out of any such laws, rules, or regulations. Moreover, there can be no
assurance that any of such liabilities to which Insignia may become subject will
not have a material adverse effect upon the business or financial condition of
Insignia.
Employees. At December 31, 1997, Insignia had approximately 11,000
employees. Of these employees, approximately 68% were employed as on-site
personnel such as resident managers and maintenance people involved in property
management. Fewer than 4% of such employees are covered by collective bargaining
agreements. Approximately 89% of Insignia's employees are full time; part-time
employees include those employed as housekeepers, porters, pool staff, lawn
maintenance, and other service positions at site locations. Insignia believes
that its employee relations are excellent. The Company's benefit programs
include group comprehensive health and life insurance plans, paid vacations, a
sick leave program, a disability plan, and a 401(k) plan.
<PAGE>
<TABLE>
Executive Officers
The following sets forth the names and ages of all persons currently serving as
executive officers of the Company, their positions with the Company and their
period of service as an executive officer of the Company. Each person serves
until his successor is elected or appointed by the Board of Directors.
<CAPTION>
Beginning Year of
Service as
Name Age Office Executive Officer
<S> <C> <C>
Andrew L. Farkas 37 Chairman of the Board of Directors, President 1990
Chairman and Chief Executive Officer of
Insignia, Chairman of the Board of Trustees
of Insignia Properties Trust
James A. Aston 45 Office of the Chairman, Chief Financial 1991
Officer of Insignia; President of Insignia
Properties Trust
Joseph T. Aveni 64 Chief Executive Officer of Realty One 1997
Anthony M. Ciepiel 38 Chief Operating Officer of Realty One 1997
Albert J. Frazia 49 Senior Vice President of Human Resources
of Insignia 1997
Frank M. Garrison 43 Executive Managing Director and President of 1993
Financial Services Division of Insignia;
Executive Managing Director of Insignia
Properties Trust
Adam B. Gilbert 45 General Counsel and Secretary of Insignia 1998
Jeffrey L. Goldberg 36 Managing Director, Investment Banking 1991
Edward S. Gordon 62 Office of the Chairman; Chairman of 1996
Insignia/ESG, Inc.
Albert H. Gossett 50 Senior Vice President and Chief Information 1991
Officer
Henry Horowitz 51 Executive Managing Director and Chief 1993
Operating Officer of Insignia/ESG, Inc.
Neil J. Kreisel 52 Executive Managing Director and President of 1995
Insignia Residential Group
Martha L. Long 39 Senior Vice President - Finance and Controller 1996
Stephen B. Siegel 53 Executive Managing Director and President of 1996
Insignia/ESG, Inc.
Thomas R. Shuler 52 Executive Managing Director and Chief 1991
Operating Officer of Insignia Residential
Group
Ronald Uretta 42 Chief Operating Officer and Treasurer of 1992
Insignia and Vice President and Treasurer
of Insigina Properties Trust
</TABLE>
Andrew L. Farkas has been a director of Insignia since its inception in
July 1990. Mr. Farkas has been Chairman and Chief Executive Officer of Insignia
since January 1991, and President since May 1995. Prior to August 1993, Mr.
Farkas was the sole director of Insignia. He has been Chairman of the Board of
Trustees of Insignia Properties Trust since December 1996.
James A. Aston has been Executive Managing Director of Investment Banking
of Insignia since January 1991, with the Office of the Chairman of Insignia
since July 1994, and Chief Financial Officer since August 1996. He became
President of Insignia Properties Trust in December 1996.
Joseph T. Aveni assumed his duties as Chief Executive Officer of Realty One
at the time of Insignia's acquisition of Realty One, Inc. and affiliated
companies in October 1997. Prior to joining Insignia, Mr. Aveni was one of the
principal owners of Realty One, Inc. in Cleveland, Ohio. Mr. Aveni has more than
30 years of experience in residential brokerage, development, and property
management.
Anthony M. Ciepiel assumed his duties as Chief Operating Officer of Realty
One at the time of Insignia's acquisition of Realty One, Inc. and affiliated
companies in October 1997. From 1994 to 1997, Mr. Ciepiel was the President of
Realty One, Inc. in Cleveland, Ohio. Prior to 1994, Mr. Ciepiel was the Chief
Financial Officer and Executive Vice President of Griswold, Inc., a full service
advertising agency.
Albert J. Frazia joined the Company as the Senior Vice President - Human
Resources in August 1997. From July 1987 to August 1997, Mr. Frazia was the
Director of Human Resources for Ernst & Young Kenneth Leventhal Real Estate
Group.
Frank M. Garrison has been Executive Managing Director of Insignia and
President of Insignia Financial Services, a division of the Company, since July
1994. Mr. Garrison became Executive Managing Director of Insignia Properties
Trust in December 1996. Between January 1993 and July 1994, Mr. Garrison was
Managing Director of Investment Banking, and, from January 1992 to December
1992, Mr. Garrison was Vice President - Investment Banking of Insignia.
Adam B. Gilbert assumed his duties as General Counsel and Secretary of
Insignia in March 1998. Prior to that time, Mr. Gilbert was a partner in the
Manhattan law firm of Nixon, Hargrave, Devans & Doyle, LLP.
Jeffrey L. Goldberg has been Managing Director of Investment Banking of
Insignia since July 1994 and served as Managing Director of Asset Management of
Insignia from January 1991 until July 1994.
Edward S. Gordon has been with the Office of the Chairman of the Company
and has been Chairman of Insignia/ESG, Inc. since July 1996. He is the founder
and was Chairman of Edward S. Gordon Company, Incorporated, a commercial
property management and brokerage firm whose assets were acquired by the Company
in June 1996.
Albert H. Gossett has been Vice President and Chief Information Officer of
Insignia since January 1991 and Senior Vice President and Chief Information
Officer of Insignia since July 1994.
Henry Horowitz was Managing Director of Insignia Commercial Group, Inc.
since January 1993 and Executive Managing Director and President since June
1994. He was promoted to Chief Operating Officer of Insignia Commercial Group in
1997 in connection with the merger of Insignia Commercial Group, Inc. with ESG.
From January 1987 to January 1993, Mr. Horowitz was the Chief Executive Officer
of First Resource Realty, Inc., a commercial property management organization,
which Insignia acquired in January 1993.
Neil J. Kreisel has been Executive Managing Director of Insignia and
President of Insignia Management Services-New York, Inc., a subsidiary of the
Company, since September 1995. Mr. Kreisel was promoted to his position of
President of the Insignia Residential Group in January 1997. For more than five
years, Mr. Kreisel has been President and Chief Executive Officer of Kreisel
Company, Inc., a residential property management firm.
Martha L. Long joined the Company as Controller of Insignia in June 1994
and was promoted to Senior Vice President - Finance and Controller in January
1997. From 1988 to June 1994, Ms. Long was Senior Vice President and Controller
for The First Savings Bank, FSB in Greenville, South Carolina.
Thomas R. Shuler was promoted to Chief Operating Officer of Insignia
Residential Group upon its creation in January 1997. Mr. Shuler has been
Managing Director of Residential Property Management of Insignia since March
1991 and served as Executive Managing Director and President of Insignia
Management Services, a former division of the Company, from July 1994 to January
1997.
Stephen B. Siegel assumed his duties as President of Insignia Commercial
Group, Inc. in January 1997 and as President of Insignia/ESG, Inc. in June 1996.
Mr. Siegel had been a Managing Director of the Company since June 1996 and
President of ESG in New York City since 1992. From 1988 to 1992, Mr. Siegel was
engaged in a joint venture with Chubb Corporation to develop and acquire
investment-grade office buildings throughout the United States.
Ronald Uretta has been Insignia's Treasurer since January 1992. Since
August 1996, he has also served as Chief Operating Officer of Insignia. He also
served as Secretary from January 1992 to June 1994 and as Chief Financial
Officer from January 1992 to August 1996. Since September 1990, Mr. Uretta has
also served as the Chief Financial Officer and Controller of Metropolitan Asset
Group, Ltd., a real estate investment banking firm. He became Vice President and
Treasurer of Insignia Properties Trust in December 1996.
There is no family relationship between any of the executive officers of
the Company.
Andrew Farkas, Chairman, President and Chief Executive Officer of the
Company, is the sole stockholder of the general partner of MAE, which has a 1%
general partner interest in MAE. Mr. Farkas is also (i) the sole stockholder of
the general partner of, and owns a 5% limited partnership interest in,
Metropolitan Acquisition Partners IV, L.P. (F"MAP IV"), which together with its
general partner beneficially owned 9.0% of the outstanding Common Stock as of
December 31, 1997, and (ii) the sole stockholder of the general partner of
Metropolitan Acquisition Partners V, L.P. ("MAP V"), which together with its
general partner beneficially owned 2.8% of the outstanding Common Stock as of
December 31, 1997.
Item 2. Properties
The Company's principal executive office is located in a 244,000 square
foot office building at One Insignia Financial Plaza, in Greenville, South
Carolina. Its lease calls for a term of ten years and six months and expires on
March 31, 2005 with two five-year renewal options exercisable by Insignia.
Presently, the Company occupies 110,000 square feet and will assume an
additional 9,000 square feet in the building as the space becomes available. The
Company has a first right of refusal to lease an additional 16,299 square feet
in the building, subject to its expansion plans. The lease contains an option to
cancel at the end of the seventh year or ninth year, each with a cancellation
penalty.
The Company also occupies approximately 21,000 square feet at Insignia
Financial Center, in Greenville, South Carolina. The lease expires on August 31,
2004 with two five-year renewal options and termination options during the
third, sixth, and eighth years of the lease. Both buildings are owned by
non-affiliated third parties. The current aggregate annual lease obligation for
both locations is $1,800,000. Nationally, the Company leases office space in 98
locations and 26 states, all from non-affiliated third parties, under leases
expiring at various dates between 1997 and 2005. Insignia believes its
facilities are adequate for their current and planned uses.
Item 3. Legal Proceedings
1997 Tender Offer Litigation. In August 1997, IPLP Acquisition I LLC, a
wholly-owned subsidiary of IPLP (the "Purchaser"), commenced tender offers for
limited partner interests in six partnerships: Century Property Fund XVII,
Century Property Fund XIX, Century Property Fund XXII, National Property
Investors 4, Consolidated Capital Properties IV and Fox Strategic Housing Income
Partners (the "Tender Partnerships").
As previously reported on Forms 10-Q, three actions were commenced arising
out of these tender offers. All three cases have been discontinued.
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.
Including the $5 million Release Fee, 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.
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.
The Company and certain subsidiaries are defendants in lawsuits arising in
the ordinary course of business. Such lawsuits are primarily insured claims
arising from accidents at managed properties. Claims may demand substantial
compensatory and punitive damages.
Management believes that the aforementioned lawsuits will be resolved
without material loss to the Company or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1997, no matter was submitted to a vote of the
stockholders of the Company through the solicitation of proxies or otherwise.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
In October 1995, the Company completed a second public offering in which
3,850,000 shares of Class A Common Stock were sold by the Company and 1,350,000
shares were sold by certain stockholders of the Company. The offering price of
the Class A Common Stock was $14.50 per share. Prior to that time, in 1993, the
Company had completed an equity offering in which 5,910,000 shares of Class A
Common Stock were sold by the Company and 3,060,000 shares by certain
stockholders of the Company at a price of $8.00 per share. The Class A Common
Stock traded on the NASDAQ National Market prior to October 3, 1995, and since
that date has traded on The New York Stock Exchange under the symbol IFS. The
following table sets forth the high and low daily closing sale prices for the
Class A Common Stock as reported on The New York Stock Exchange for each quarter
of 1996 and 1997.
Calendar Period High Low
1996
First Quarter............................. 24 3/8 17 3/16
Second Quarter............................ 29 5/8 20 1/2
Third Quarter............................. 27 20 1/4
Fourth Quarter............................ 26 20 3/4
1997
First Quarter............................. 25 6/8 17 3/8
Second Quarter............................ 19 5/8 16 7/8
Third Quarter............................. 20 3/8 15 1/4
Fourth Quarter............................ 23 5/8 19
The Company's transfer agent is First Union National Bank of North
Carolina, 230 S. Tryon Street, 10th Floor, Charlotte, North Carolina 28288-1154.
As of February 27, 1998, there were approximately 1,700 shareholders of record
of the Class A Common Stock.
The Company has never paid dividends upon the Class A Common Stock and does
not currently intend to pay any dividends in the foreseeable future. Any payment
of future dividends and the amounts thereof will be dependent upon the Company's
earnings, financial requirements and other factors, including contractual
obligations. The payment of dividends is subject to certain restrictions under
the revolving credit facility. The Company declared a two-for-one stock split,
effected as a stock dividend, on January 29, 1996.
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.
<PAGE>
<TABLE>
The tables set forth below provide a variety of statistical information
about the Company. The Company 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"), 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 the Company's cash requirements.
<CAPTION>
Year Ended December 31,
(In thousands except per share data)
1997 1996 1995 1994 1993
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) gain -- (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
December 31,
(In thousands)
1997 1996 1995 1994 1993
Balance Sheet Data(1):
Cash and cash equivalents $ 88,847 $ 54,614 $ 49,846 $ 36,596 $34,005
Management contracts 147,256 122,915 88,816 73,411 38,620
Investment in real estate limited
partnerships and other
securities 215,735 150,863 60,473 37,926 --
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
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
Year Ended December 31,
(In thousands except per share data)
1997 1996 1995 1994 1993
Supplemental Data
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
Net EBITDA per share 1.93 1.45 1.09 0.98 0.96
</TABLE>
(1) The Company and its affiliates have acquired control of, or management
rights to, 42 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, apartment property, and minority interest).
(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.
(4) EBITDA and FFO less interest expense and earnings allocable to preferred
securities. 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. 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. 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 Company 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 increase 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.
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% from $5.8
million in 1995 to $8.6 million in 1996. Diluted earnings per share was $.26 for
1996 compared to $.20 for 1995.
<PAGE>
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.
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>
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.
<TABLE>
<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 feetof 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 an 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>
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in Item 14(a) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference to Registrant's definitive Proxy Statement
to be filed in connection with the Annual Meeting of Stockholders.
Item 11. Executive Compensation
Incorporated herein by reference to Registrant's definitive Proxy Statement
to be filed in connection with the Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to Registrant's definitive Proxy Statement
to be filed in connection with the Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to Registrant's definitive Proxy Statement
to be filed in connection with the Annual Meeting of Stockholders.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2): The response to this portion of Item 14 is submitted as a
separate section of this report - see Page F-2.
(3) Exhibits: See Exhibit Index contained herein.
(b): Reports on Form 8-K filed in fourth quarter of 1997:
Form 8-K dated September 17, 1997 and filed October 31,
1997 disclosing the completion of tender offers in
six of the partnerships controlled by IPT, a
controlled REIT affiliate of the Registrant.
Form 8-K dated October 10, 1997 and filed October 22,
1997 disclosing Registrant's acquisition of Realty
One, Inc.
Form 8-K dated October 27, 1997 and filed November 10,
1997 disclosing Registrant's acquisition of the
Class B stock of First Winthrop Corporation and limited
partnership interests in certain partnerships
controlled by First Winthrop.
Form 8-K dated September 17, 1997 and filed November
20, 1997 disclosing Registrant's acquisition of
Barnes, Morris, Pardoe & Foster.
Form 8-K dated November 14, 1997 and filed November 17,
1997 disclosing Registrant's announcement that the
preliminary proxy statement for the pending merger of
IPT, the Registrants' controlled REIT affiliate, with
Angeles Mortgage Investment Trust, was filed with the
SEC.
Form 8-K/A dated October 10, 1997 and filed December
23, 1997 amending Form 8-K filed October 22, 1997 to
file financial statements for the Realty One,
Inc. acquisition.
(c) Exhibits: The response to this portion of Item 14 is submitted as
a separate section of this report.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as
a separate section of the report. See Page F-2.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSIGNIA FINANCIAL GROUP, INC.
By: /s/Andrew L. Farkas
------------------------------------------
Andrew L. Farkas
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
By: /s/Andrew L. Farkas By: /s/Robin L. Farkas
- -------------------------------- ----------------------------------------
Andrew L. Farkas Robin L. Farkas
Chairman of the Board, President Director
and Chief Executive Officer
By: /s/James A. Aston By: /s/Merril M. Halpern
- -------------------------------- ----------------------------------------
James A. Aston Merril M. Halpern
Chief Financial Officer Director
By: /s/Martha L. Long By: /s/Robert G. Koen
- -------------------------------- ----------------------------------------
Martha L. Long Robert G. Koen
Senior Vice President - Director
Finance and Controller
By: /s/Michael I. Lipstein
----------------------------------------
Michael I. Lipstein
Director
By: /s/Buck Mickel
----------------------------------------
Buck Mickel
Director
By: /s/Robert J. Denison
----------------------------------------
Robert J. Denison
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1997
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
GREENVILLE, SOUTH CAROLINA
<PAGE>
FORM 10-K - ITEM 14(a)(1) AND (2)
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Insignia Financial Group,
Inc. and subsidiaries are included in Item 8:
Insignia Financial Group, Inc. and subsidiaries
Consolidated balance sheets - December 31, 1997 and 1996
Consolidated statements of operations - Years ended December 31, 1997,
1996 and 1995
Consolidated statements of stockholders' equity - Years ended December 31,
1997, 1996 and 1995
Consolidated statements of cash flows - Years ended December 31, 1997,
1996 and 1995
Notes to consolidated financial statements
All other financial statements and schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and therefore
have been omitted.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Stockholders and Board of Directors
Insignia Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Insignia
Financial Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Insignia Financial
Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Greenville, South Carolina
February 13, 1998,
except for Note 20, as to which the date is
March 19, 1998
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------------
-----------------------------------
(In thousands)
<S> <C> <C>
Assets
Cash and cash equivalents, including $18,822 (1997) and
$47,255 (1996) of reverse repurchase agreements ............................ $ 88,847 $ 54,614
Receivables ................................................................... 122,180 46,040
Property and equipment ........................................................ 19,011 12,083
Investments in real estate limited partnerships and
other securities ........................................................... 215,735 150,863
Apartment property ............................................................ 22,357 22,125
Property management contracts ................................................. 147,256 122,915
Costs in excess of net assets of acquired businesses .......................... 158,524 75,627
Other assets .................................................................. 26,313 8,135
------- -------
Total assets .................................................................. $ 800,223 $ 492,402
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable ........................................................... $ 13,705 $ 1,711
Commissions payable ........................................................ 51,285 18,736
Accrued and sundry liabilities ............................................. 102,009 40,741
Notes payable .............................................................. 170,404 49,840
Non-recourse mortgage note payable ......................................... 19,300 19,300
------- -------
356,703 130,328
Company-obligated mandatory redeemable convertible
preferred securities of a subsidiary trust ................................. 144,065 144,169
Minority interests in consolidated subsidiaries ............................... 61,546 --
Stockholders' Equity:
Common Stock, Class A, par value $.01 per share - authorized
100,000,000 shares, issued and outstanding 30,159,161 (1997) and
28,857,097 (1996) shares, and 166,400 (1997) shares held in treasury 302 289
Additional paid-in capital ................................................. 201,597 189,657
Retained earnings .......................................................... 36,010 27,959
------- -------
Total stockholders' equity .................................................... 237,909 217,905
-------
Total liabilities and stockholders' equity .................................... $ 800,223 $ 492,402
======= =======
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands except for per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Fee based services, including fees from affiliated partnerships
of $67,816 (1997), $55,656 (1996) and $49,478 (1995) $388,922 $215,623 $118,828
Interest 4,571 3,104 2,780
Other 704 2,327 1,424
Apartment property 6,646 6,020 -
--------------------------------------------
400,843 227,074 123,032
Costs and expenses:
Fee based services 315,653 164,830 85,707
Administrative 10,233 7,216 8,020
Apartment property 3,251 3,034 -
Interest 7,867 12,918 7,049
Apartment property interest 1,486 1,812 -
Depreciation and amortization 31,709 23,031 13,493
Apartment property depreciation 966 901 -
Release fee 5,000 - -
Legal reserve 5,202 - -
Termination of employment agreements - - 1,000
--------------------------------------------
381,367 213,742 115,269
Equity earnings - limited partnership interests 10,027 3,590 2,461
Minority interests in consolidated subsidiaries (12,448) (1,976) (131)
--------------------------------------------
Income before income taxes and extraordinary item 17,055 14,946 10,093
Provision for income taxes 6,822 5,680 3,835
--------------------------------------------
Income before extraordinary item 10,233 9,266 6,258
Extraordinary item - loss on retirement of debt, net of
income taxes of $430 (1996) and $276 (1995)
- (702) (452)
--------------------------------------------
Net income $ 10,233 $ 8,564 $ 5,806
============================================
============================================
Per share amounts - basic:
Income before extraordinary item $.35 $.33 $.23
Extraordinary item - .03 .02
============================================
Net income $.35 $.30 $.21
============================================
Per share amounts - assuming dilution:
Income before extraordinary item $.32 $.28 $.22
Extraordinary item - .02 .02
--------------------------------------------
Net income $.32 $.26 $.20
============================================
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-in Retained
Class A Class B Capital Earnings
--------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 99 $ 2 $ 63,672 $15,033
Issuance of 2,747,924 shares of common stock 28 - 72,320 -
Exercise of stock options - 132,179 shares
of common stock issued 1 - 1,297 -
Conversion of Class B common
stock to Class A 2 (2) - -
Dividend on convertible preferred
stock - - - (1,245)
Net income for 1995 - - - 5,806
Adjustment for two-for-one stock split 12,938,833
shares 129 - (129) -
--------------------------------------------------------------
Balance at December 31, 1995 259 - 137,160 19,594
Exercise of stock options - 334,937 shares
of common stock issued 3 - 2,225 -
October 1995 issuance costs - - (79) -
Exercise of warrants - 17,700 shares of common
stock issued 1 - 141 -
Tax benefit of exercised options and warrants - - 637 -
Conversion of subordinated note payable -
1,117,732 shares of common stock issued 11 - 10,048 -
Conversion of redeemable preferred stock -
1,509,062 shares of common stock issued 15 - 15,075 -
Assumption of options in ESG acquisition - - 24,450 -
Dividend on convertible preferred stock - - - (199)
Net income for 1996 - - - 8,564
--------------------------------------------------------------
Balance at December 31, 1996 289 - 189,657 27,959
Exercise of stock options - 1,193,404 shares
of common stock issued 12 - 6,825 -
Exercise of warrants - 65,000 shares of common
stock issued 1 - 649 -
Issuance of 210,000 shares of common
stock in Realty One acquisition 2 - 4,198 -
Repurchase of common stock - 166,400
shares held in treasury (2) - (1,099) (2,182)
Restricted stock awards - - 550 -
Tax benefit of exercised options and warrants - - 817 -
Net income for 1997 - - - 10,233
==============================================================
Balance at December 31, 1997 $ 302 $ - $201,597 $ 36,010
==============================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-----------------------------------------------------
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 10,233 $ 8,564 $ 5,806
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31,709 23,031 13,493
Apartment property depreciation 966 901 -
Equity in earnings of partnerships (10,027) (3,590) (2,461)
Extraordinary loss - 1,132 728
Minority interests in consolidated subsidiaries 12,448 1,976 131
Deferred income taxes (4,044) (2,516) (820)
Changes in operating assets and liabilities:
Accounts receivable (51,362) (33,429) (1,234)
Other assets (9,682) (527) 133
Accrued compensation 13,643 7,326 1,635
Accounts payable and accrued expenses 13,530 (5,108) (1,987)
Commissions payable 32,549 18,134 -
-----------------------------------------------------
29,730 7,330 9,618
-----------------------------------------------------
Net cash provided by operating activities 39,963 15,894 15,424
-----------------------------------------------------
-----------------------------------------------------
Investing activities
Decrease (increase) in restricted cash, net - 6,282 (6,110)
Additions to property and equipment, net (7,695) (6,364) (3,276)
Payments made for acquisition of management contracts and
acquired businesses (95,797) (97,248) (22,489)
Proceeds from Balcor dispositions 6,762 8,231 -
Purchase of real estate partnership interests (93,118) (99,145) (23,955)
Distributions from partnerships 38,061 12,347 11,130
Advances made under note agreements (9,172) (8,077) (16,376)
Collections on notes receivable 4,523 21,911 4,366
Investment in apartment property, net of
acquired cash - (8,005) -
Organization costs on formation of IPT (3,743)
-----------------------------------------------------
Net cash used in investing activities (160,179) (170,068) (56,710)
-----------------------------------------------------
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from issuance of common stock $ - $ - $ 71,558
Proceeds from issuance of preferred stock - - 15,000
Proceeds from trust based convertible
preferred securities - 149,500 -
Proceeds from refinancing non-recourse
mortgage note - 19,300 -
Proceeds from issuance of common stock of IPT 62,420 - -
Proceeds from exercise of stock options 7,487 2,519 1,298
Purchase of treasury stock (3,283) - -
Payment of preferred stock dividends - (281) (1,072)
Payment of distributions on trust based
convertible preferred securities (10,003) (1,619) -
Distributions made to minority interests (2,575) (432) (100)
Investment made by minority interests 249 - 2,651
Payments on notes payable (15,682) (162,498) (121,731)
Payments on non-recourse mortgage note - (16,876) -
Proceeds from notes payable 118,141 175,740 89,660
Debt and stock issuance costs (2,305) (6,411) (2,728)
-----------------------------------------------------
Net cash provided by financing activities 154,449 158,942 54,536
-----------------------------------------------------
Net increase in cash and cash equivalents 34,233 4,768 13,250
Cash and cash equivalents at beginning of year 54,614 49,846 36,596
-----------------------------------------------------
Cash and cash equivalents at end of year $ 88,847 $ 54,614 $ 49,846
=====================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization
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 and Italy. As a full
service real estate management organization, Insignia performs property
management, asset management, investor services, partnership accounting, real
estate investment banking, mortgage banking and real estate brokerage services
for various types of property owners.
One of the Company's subsidiaries, Insignia Properties Trust ("IPT"), was formed
in 1996 for the purpose of acquiring and owning interests in multifamily
residential and commercial properties, including limited and general partner
interests in partnerships which hold such real estate properties. IPT has been
organized in a manner that will allow it to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986. The Company and certain
of its affiliates have transferred to IPT equity interests in entities
comprising or controlling the general partners of certain public real estate
limited partnerships in exchange for shares of beneficial interest of IPT.
IPT is the sole general partner of Insignia Properties L.P. ("IPLP"), which
functions as the operating partnership of IPT. The Company has transferred to
IPLP certain of its limited partner interests in real estate limited
partnerships (or equity interests in entities which own such interests) in
exchange for units of limited partner interest in IPLP, which units are
exchangeable for common shares of IPT or are redeemable for cash. As a result of
these transactions, at December 31, 1997 and 1996, IPT was 75% and 98% owned by
the Company.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned or majority-owned. All
significant intercompany balances and transactions have been eliminated. Certain
amounts for prior years have been reclassified to conform with the 1997
presentation.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The amount of cash on deposit in federally insured institutions periodically
exceeds the limit on insured deposits. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Loans Receivable
The allowance for credit losses related to loans that are identified for
impairment is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. No significant loans are estimated to be impaired as of
December 31, 1997.
Investments in Real Estate Limited Partnerships
Investments in real estate limited partnerships represent general partner
interests of .2% to 4% in certain limited partnerships and limited partner
interests in real estate limited partnerships. The investments in real estate
limited partnerships are accounted for by the equity method. Equity in earnings
from these partnerships amounted to approximately $10,027,000, $3,590,000 and
$2,461,000 for 1997, 1996 and 1995, respectively. Equity in earnings for 1996
excludes the Company's equity interest in extraordinary losses by the
partnerships from early extinguishments of debt of $1,132,000.
Minority Interest
Minority interests in consolidated subsidiaries consist of the respective
ownership of the minority shareholders.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$2,913,000, $1,815,000 and $758,000 in advertising costs during 1997, 1996 and
1995, respectively.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation of
$8,507,000 (1997), and $5,681,000 (1996). Property and equipment consists of
office furniture and fixtures, data processing equipment, computer software, and
leasehold improvements.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Depreciation expense was $2,850,000
(1997), $1,842,000 (1996) and $1,444,000 (1995).
Property Management Contracts and Costs in Excess of Net Assets of Acquired
Businesses
Property management contracts are stated at cost, net of accumulated
amortization of $68,772,000 (1997) and $46,020,000 (1996). The Company
capitalizes costs paid or payable to third parties in the successful pursuit of
acquiring management contracts. These contracts are amortized by the
straight-line method over three to fifteen years. All costs related to
unsuccessful attempts to acquire management contracts are expensed by the
Company.
The carrying value of the property management contracts is reviewed if the facts
and circumstances indicate that it may be impaired. If the review indicates that
the property management contract costs will not be recoverable, as determined by
the estimated profitability of the revenue generated by each portfolio, the
Company's carrying value of the property management contract costs are reduced
by the estimated shortfall on a discounted basis. No significant contracts are
estimated to be impaired as of December 31, 1997, although termination in the
future could adversely affect this estimate.
Costs in excess of net assets of acquired businesses are amortized by the
straight-line method primarily over 15 to 25 years. Accumulated amortization is
$7,036,000 (1997) and $2,553,000 (1996).
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries Notes to Consolidated Financial
Statements (continued)
2. Summary of Significant Accounting Policies (continued)
During 1996, the Company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" (FAS 121), which requires
impairment losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the assets carrying amount. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount. The
adoption of FAS 121 had no material effect on the accompanying financial
statements.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does anticipate
that the adoption of this statement will change the method by which the Company
reports segment disclosures.
Loan Costs
The Company capitalizes costs paid to third parties for obtaining or refinancing
outstanding indebtedness. These costs are amortized over the term of the
respective outstanding debt. Prepaid points are deducted from the related debt
and are amortized over the term of the debt.
Revenue Recognition
Fee based services includes property management and commercial leasing fees,
partnership administration and asset management fees, loan origination and loan
servicing fees and investment banking fees and commission revenue related to
real estate sales. Such revenues are recorded when the related services are
performed, unless significant contingencies exist, or at contract closing in the
case of real estate sales.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries Notes to Consolidated Financial
Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Distributions
IPT intends to pay distributions of at least the amount required to maintain
REIT status under the Internal Revenue Code. In August 1997, the IPT Board
adopted a policy to pay a quarterly distribution of $0.15 per common share;
however, the payment of any distribution will be dependent on the liquidity and
cash flows of IPT, which are primarily dependent on distributions from the
underlying partnerships.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". Under Statement 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
IPT elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), beginning with its
taxable year ending December 31, 1996. Generally, a REIT which complies with the
provisions of the Code and distributes at least 95% of its taxable income to its
shareholders does not pay federal income taxes on its distributed income. If IPT
fails to qualify as a REIT in any year, its taxable income may be subject to
income tax at regular corporate rates (including any applicable alternative
minimum tax). Even if IPT qualifies for taxation as a REIT, it may be subject to
certain state and local taxes on its income and excise taxes on its
undistributed income.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Distributions declared of $0.53 per share to IPT shareholders of record on
December 30, 1996 and $0.15 per share to shareholders of record on October 31,
1997 were paid during the year ended December 31, 1997. Distributions declared
of $0.20 per share were paid during the year ended December 31, 1996. For
federal tax purposes, the portions of the 1997 distribution relating to return
of capital and earnings and profits are 59% and 41%, respectively. The 1996
distribution consisted entirely of a return of capital. No REIT operating income
was earned during 1996. Earnings and profits which determine the taxability of
dividends to shareholders, differ from net income reported for financial
reporting purposes due to differences for federal tax purposes in the estimated
useful lives to compute depreciation and the carrying value (basis) of the
investment in partnership interests. The Company is taxed on its share of
distributions received from IPT.
Foreign Currency Translation
The financial statements of all foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of income. Translation
adjustments in 1997 were not material.
3. Earnings Per Share
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
requirements.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Earnings Per Share (continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Numerator
Net income $ 10,233 $ 8,564 $ 5,806
Preferred stock dividends - (199) (1,245)1
------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 10,233 8,365 4,561
Effect of dilutive securities:
Preferred stock dividends - 199 -1
Convertible notes - 152 -
------------------------------------------------------
- 351 -
======================================================
Numerator for diluted earnings per share -
income available to common stockholders after assumed
conversions $ 10,233 $ 8,716 $ 4,561
======================================================
Denominator
Denominator for basic earnings per share - weighted average
shares 29,160,330 27,846,807 21,326,414
Effect of dilutive securities:
Employee stock options 1,611,388 3,471,260 672,628
Warrants 808,773 1,006,861 729,736
Convertible notes - 653,658 -
------------------------------------------------------
Dilutive potential common shares 2,420,161 5,131,779 1,402,364
======================================================
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions
31,580,491 32,978,586 22,728,778
======================================================
Basic earnings per share $.35 $.30 $.21
======================================================
Diluted earnings per share $.32 $.26 $.20
======================================================
<FN>
1 Conversion of the convertible preferred stock is not assumed in
the computation because its effect is anti-dilutive.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions
During 1997, Insignia completed the acquisition of certain property management
and brokerage companies, including the following: Rostenberg-Doern, Inc.; HMB
Property Services, Inc.; Frain, Camins & Swartchild, Inc.; The Related Companies
of Florida; Radius Retail Advisors; Forum Properties, Inc.; Realty One, Inc. and
affiliated companies; 100% of the Class B stock of First Winthrop Corporation
and a general partnership interest in Winthrop Financial Associates; and Barnes,
Morris, Pardoe & Foster. In addition, the Company expanded internationally with
the purchase of 60% of the stock of Compagnia di Amministrazione e Gestioni
Immobiliare S.p.A. ("CAGISA"), a privately held property management company in
Italy. The Company's significant acquisitions during the last three years are
discussed below.
1997 Acquisitions
Frain, Camins & Swartchild Acquisition
On April 1, 1997, the Company acquired Frain, Camins & Swartchild, Inc.
("FC&S"). FC&S is a full service commercial, retail and industrial real estate
brokerage firm located in Chicago, Illinois. The purchase price paid by Insignia
for FC&S was approximately $4.4 million, consisting of $3.5 million paid in cash
and $850,000 in related acquisition costs. In addition, up to $4.5 million in
contingent payments may be paid based on certain future performance measures.
The contingent payments, when paid, will be recorded as additional acquisition
costs. The operations of FC&S have been included in the operations of the
Company since April 1, 1997. The acquisition was accounted for as a purchase.
The Related Companies of Florida Acquisition
On April 29, 1997, the Company acquired a portfolio of certain management rights
from The Related Companies of Florida ("Related"). The transaction includes the
management of approximately 10,300 units of multifamily residential housing, all
of which are located in the state of Florida. The purchase price paid by
Insignia for these rights was approximately $12.0 million, consisting of $10.5
million paid in cash, $528,000 in notes payable (net of $8 million in notes
receivable issued to the sellers) and approximately $1.0 million in contingent
payments and acquisition costs. The operations of Related have been included in
the operations of the Company since April 29, 1997. The acquisition was
accounted for as a purchase.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
Realty One, Inc. and Affiliates Acquisition
On October 13, 1997, the Company acquired the outstanding stock of Realty One,
Inc. and affiliated companies ("Realty One"), including First Ohio Mortgage
Corporation. Realty One is a full service residential real estate brokerage firm
headquartered in Cleveland, Ohio and serving primarily the northern region of
Ohio. First Ohio Mortgage Corporation originates single family home mortgages
for both Realty One clients and third parties. The purchase price paid by
Insignia for Realty One was $39.1 million, consisting of approximately $34.1
million in cash, and 210,000 shares of the Company's Class A Common Stock,
valued at $4.2 million. In addition, the Company has incurred $825,000 of
acquisition costs. The operations of Realty One have been included in the
operations of the Company since October 10, 1997. The acquisition was accounted
for as a purchase.
First Winthrop Corporation Acquisition
On October 27, 1997, the Company acquired 100% of the Class B stock of First
Winthrop Corporation and a general partnership interest in Winthrop Financial
Associates ("Winthrop"). This acquisition gives the Company the right to direct
the activities of real estate limited partnerships owning 47 apartment
properties comprising approximately 16,500 residential apartment units. In
addition, the Company acquired limited partnership interests in, or the right to
acquire limited partner interests in, certain of these partnerships which own 29
properties comprising approximately 12,100 residential apartment units. The
purchase price paid by Insignia for Winthrop was approximately $78.4 million,
including approximately $28.3 million for limited partnership interests. A
deferred tax liability of approximately $17.7 million was recorded in connection
with the acquisition. The Winthrop acquisition was accounted for as a purchase.
All operations attributable to the Winthrop acquisition have been included in
the operations of the Company since October 27, 1997. (See Note 16 for further
discussion of Winthrop).
Barnes, Morris, Pardoe & Foster Acquisition
On October 30, 1997, the Company acquired substantially all of the assets of
Barnes, Morris, Pardoe & Foster ("Barnes Morris"), a commercial real estate
services firm located in the greater Washington, D.C. area. The purchase price
paid by Insignia for Barnes Morris was $17.0 million, consisting of
approximately $15.2 million in cash and $1.8 million in acquisition costs and
contingent guarantees. The operations of Barnes Morris have been included in the
operations of the Company since October 30, 1997. The acquisition was accounted
for as a purchase.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
1996 Acquisitions
Edward S. Gordon Company, Inc. Acquisition
On June 30, 1996, the Company acquired the business and substantially all of the
assets of Edward S. Gordon Company, Incorporated ("ESG"). ESG's services include
commercial real estate leasing, including tenant and landlord representation,
real estate consulting services and commercial real estate brokerage as well as
commercial property management in the New York City metropolitan area. At
closing, ESG managed approximately 25.5 million square feet of commercial space
comprised of 57 properties in New York, New Jersey and Connecticut. The purchase
price paid by Insignia for ESG was $73.8 million, consisting of $49.3 million in
cash, and $24.5 million of stock options for ESG employees. Additionally, the
Company has incurred $875,000 in acquisition costs and a loan of $5 million was
granted at the time of the purchase to Edward S. Gordon.
Paragon Group Property Services, Inc. Acquisition
On June 30, 1996, the Company acquired the commercial real estate services
business of Paragon Group Property Services, Inc. ("Paragon"). Paragon's
services include property management, leasing and tenant improvement services
for managed properties as well as brokerage, fee development and real estate
consulting services performed for various institutional clients. At closing, the
acquired business managed and leased approximately 22 million square feet of
commercial space comprised of 166 properties located in 17 states. The purchase
price paid by Insignia for Paragon was $18.5 million in cash, an additional $4
million in future contingent purchase price (without interest), and warrants to
acquire 50,000 shares of Class A Common Stock of Insignia. The warrants are
exercisable for a period of five years from closing at $29 per share.
Additionally, the Company incurred $930,000 of acquisition costs and recorded a
net deferred tax liability of $1.2 million resulting from book and tax
differences related to the acquisition.
Both the ESG and Paragon acquisitions were accounted for as purchases. The
operations of Paragon and ESG have been included in the operations of the
Company since June 30, 1996.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
National Properties, Inc. Acquisition
On January 19, 1996, the Company purchased substantially all of the assets of
National Properties, Inc. ("NPI"), its property management affiliates and
certain of its limited partner interests in real estate limited partnerships for
an aggregate purchase price of approximately $116 million. In the purchase,
Insignia acquired (a) a significant percentage of the limited partnership
interests in 14 public real estate limited partnerships, (b) all of the issued
and outstanding common stock of NPI, which in turn owned or controlled, directly
or indirectly, one or more of the general partners of certain public real estate
limited partnerships and certain private limited partnerships, and (c)
affiliates of NPI which provide real estate management services, including not
less than $13.5 million in net liquid assets. A deferred tax liability of
approximately $10.8 million was recorded in connection with the acquisition. All
of the funds used to purchase NPI were drawn on Insignia's revolving credit
facility with First Union National Bank of South Carolina. The NPI acquisition
was accounted for as a purchase. The operations of NPI have been included in the
operations of the Company since January 19, 1996.
1995 Acquisitions
Douglas Elliman-Gibbons & Ives Acquisition
On September 5, 1995, Insignia purchased the residential property management
business of Douglas Elliman-Gibbons & Ives and all of the outstanding stock of
Kreisel Company, Inc. (collectively "DEK"). Collectively, the acquired
operations manage approximately 300 properties containing approximately 54,000
residential units, all of which are within the metropolitan New York City market
and a substantial majority of which are within Manhattan. The purchase price
paid by Insignia for these businesses was $14.0 million, consisting of $13.0
million in cash, of which $10 million was financed with a short-term loan from
First Union National Bank of South Carolina, and $1.0 million in newly issued
shares of Insignia Class A Common Stock (68,708 shares at $14.56 per share). A
deferred tax liability of $3.1 million was recorded as a result of book and tax
differences related to the acquisition. This acquisition was accounted for as a
purchase. The operations of DEK have been included in the operations of the
Company since September 5, 1995.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
O'Donnell Property Services, Inc. Acquisition
On May 1, 1995, Insignia acquired all of the outstanding common stock of
O'Donnell Property Services, Inc. ("OPSI") for consideration having an aggregate
value as of the date of acquisition of approximately $7.0 million, including
$2,000,000 in unsecured convertible notes and 55,556 shares of Insignia Class A
Common Stock. Insignia acquired property management rights to approximately 23.6
million square feet of commercial, retail, office, and warehouse space located
principally in California and Nevada. Insignia entered into consulting
agreements with certain of the principal executives of OPSI for a period of five
years. Such executives also entered into non-competition agreements with
Insignia precluding their engaging in the business of commercial property
management in California or Nevada for a period of five years. The OPSI
acquisition resulted in a significant increase in commercial property management
by Insignia. The operations of OPSI have been included in the operations of the
Company since May 1, 1995. This acquisition was accounted for as a purchase.
Other Information
Pro forma results of operations for the years ended December 31, 1997, 1996 and
1995 assuming consummation of the FC&S, Related, Realty One, Winthrop and Barnes
Morris acquisitions at January 1, 1996, and assuming consummation of the ESG,
Paragon, NPI, DEK and OPSI acquisitions at January 1, 1995, is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $508,283 $431,353 $280,197
Income before extraordinary item 9,413 7,183 7,664
Net income 9,413 6,481 7,212
Diluted earnings per common share:
Income before extraordinary item $.30 $.22 $.24
Net income $.30 $.20 $.22
</TABLE>
The combined pro forma results of operations of the Company's other 1997
acquisitions were not disclosed based on the materiality of each transaction.
The total cost of the Company's other 1997 acquisitions approximated $8.2
million.
These results do not purport to represent the operations of the Company nor are
they necessarily indicative of the results that actually would have been
realized by the Company if the purchase of the operating entities had been in
effect the entire period.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
The cost of the FC&S, Related, Realty One, Winthrop, Barnes Morris (1997), ESG,
Paragon, and NPI (1996) acquisitions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
------------------------------------------------------
<S> <C> <C> <C>
Notes payable and common stock $ 21,463 $ 26,525 $ 3,711
Accrued and sundry liabilities 15,658 4,298 1,789
Deferred tax liability, net 17,652 11,909 3,115
Cash paid at the closing dates 121,415 175,892 17,185
------------------------------------------------------
$176,188 $218,624 $25,800
======================================================
The cost was allocated as follows:
1997 1996 1995
------------------------------------------------------
------------------------------------------------------
Cash acquired $ 1,383 $ - $ -
Accounts receivable 5,533 - -
Notes receivable - 5,000 -
Mortgage loans receivable 8,414 - -
Property and equipment 2,123 - -
Property management contracts 47,811 63,260 24,324
Non-compete agreements - 1,700 -
Goodwill 80,067 74,232 -
Other assets 2,529 594 1,476
Investment in limited partnership units 28,328 73,838 -
------------------------------------------------------
$176,188 $218,624 $25,800
======================================================
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Reverse Repurchase Agreements
Periodically, the Company invests in reverse repurchase agreements. At December
31, 1997 and 1996, respectively, the Company had $8,856,000 and $12,952,000, in
reverse repurchase agreements with First Union National Bank of South Carolina
("First Union") collateralized by obligations of the Government National
Mortgage Association ("GNMA") with a weighted average interest rate of 5.5%
(1997) and 5.8% (1996) with maturities of one to three weeks. In addition, the
Company has an agreement with First Union whereby it purchases various bonds
with variable interest rates. The bank has guaranteed repurchase of the bonds at
par with a 7-day notice from the Company. At December 31, 1997 and 1996,
respectively, the Company had $9,966,000 and $34,303,000 invested in such bonds
with a weighted average interest rate of 5.7% and 3.7%. All investments for 1997
and 1996 are reflected in the accompanying balance sheet at cost which
approximated market value as of such date and are included in cash and cash
equivalents.
The Company generally does not take possession of the securities purchased under
agreements to resell.
6. Receivables
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------------
-----------------------------------
(In thousands)
<S> <C> <C>
Accounts receivable $ 23,466 $ 9,899
Commissions receivable 76,838 33,372
Mortgage loans receivable 11,991 -
Income tax refund receivable 4,488 -
Notes receivable:
Brokerage employees with interest at prime plus 1% 1,894 1,104
Outside entities with interest ranging from 8% to 11% 238 60
Affiliates with interest ranging from 8% to 24% 2,513 1,428
Chairman, executive officers, and other employees with
interest ranging from 6% to 10% 752 177
-----------------------------------
5,397 2,769
-----------------------------------
$122,180 $46,040
===================================
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Receivables (continued)
Accounts receivable consist primarily of management fees expected to be
collected in 1998. The accounts receivable are not collateralized, but credit
losses have been insignificant and within management's estimate. Commissions
receivable consist of commercial lease commissions, substantially from ESG
operations, of $70,808,000 (1997) and $29,814,000 (1996). Certain notes
receivable are collateralized by various partnership interests, assignment of
notes and liens, and real estate.
Principal collections on notes receivable are scheduled as follows (in
thousands):
Notes Commissions
Receivable Receivable
------------------------------------
1998 $2,020 $69,506
1999 247 6,390
2000 2,339 815
2001 305 89
2002 144 14
Later years 342 24
------------------------------------
$5,397 $76,838
====================================
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Investments in Real Estate Limited Partnerships
The Company has significant equity investments in 50 limited partnerships,
through IPT controlled and co-investment partnerships, which own real estate
consisting primarily of residential apartments and commercial property
throughout the United States. The Company's capital ownership percentages of
such investments as of December 31, 1997 are as follows:
Capital
Real Estate Limited Partnership Ownership %
- --------------------------------------------------- --------------------
Consolidated Capital Growth Fund 39%
Consolidated Capital Institutional Properties 26%
Consolidated Capital Institutional Properties/3 12%
Consolidated Capital VI 22%
Consolidated Capital III 24%
Consolidated Capital IV 27%
Johnstown/Consolidated Income Partners 10%
Davidson Growth Plus, L.P. 11%
Shelter Properties I 39%
Shelter Properties II 33%
Shelter Properties III 34%
Shelter Properties IV 32%
Shelter Properties V 39%
Shelter Properties VI 28%
National Property Investors III 45%
National Property Investors 5 47%
National Property Investors 6 44%
National Property Investors 7 43%
National Property Investors 8 38%
Century Property Fund XIV 41%
Century Property Fund XV 40%
Century Property Fund XVI 37%
Century Property Fund XVII 38%
Century Property Fund XVIII 29%
Century Property Fund XIX 33%
Century Property Fund XXII 27%
Fox Strategic Housing Income Partners 15%
Consolidated Capital Institutional Properties/2 20%
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Investments in Real Estate Limited Partnerships (continued)
Capital
Real Estate Limited Partnership Ownership %
- ------------------------------------------ ---------------------
Courtyard Plaza Associates, L.P. 20%
101 Marietta Street Associates 10%
Mockingbird Associates, L.P. 10%
Brickyard Investors, L.P. 19%
Southwest Associates, L.P. 25%
Brookhollow Associates, L.P. 20%
Western Hills Associates LLC 10%
Bingham Partners, L.P. 10%
Nashpike Partners, L.P. 30%
Bennington Square Associates, L.P. 20%
Sleepy Lake Partners, L.P. 20%
Northpoint Partners, L.P. 10%
Chimney Ridge Associates, L.P. 20%
Cobble Creek, LLC 20%
Clayton Investors Associates, LLC 20%
Fresh Meadows Development, LLC 35%
Glades Plaza, L.P. 20%
Hiawassee Oak Partners, L.P. 30%
Springhill Lake Investors, L.P. 37%
Riverside Park Associates, L.P. 35%
Winrock-Houston, L.P. 35%
Winthrop Texas Investors, L.P. 20%
These limited partnerships own approximately 212 properties comprising 54,390
apartment units and 5.5 million square feet of commercial space.
The Company, through its ownership in IPT, owns 62% of National Property
Investors 4 and therefore consolidates the financial statements of this
partnership.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Investments in Real Estate Limited Partnerships (continued)
Summarized financial information of the unconsolidated limited partnerships is
as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Condensed Statements of Earnings Information
Revenues $391,807 $255,922 $107,111
Property operating expenses 204,716 140,414 59,615
Provision for impairment - - 8,255
Depreciation and amortization 72,067 50,504 23,891
Interest 85,897 53,334 14,666
Administrative 14,250 10,897 7,554
-----------------------------------------------------
Total operating expenses 376,930 255,149 113,981
-----------------------------------------------------
Income (loss) from operations 14,877 773 (6,870)
Other gains 8,680 6,640 1,956
-----------------------------------------------------
Income (loss) before extraordinary items 23,557 7,413 (4,914)
Extraordinary items - loss on retirement of debt (819) (2,580) 126
-----------------------------------------------------
Net income (loss) $ 22,738 $ 4,833 $ (4,788)
=====================================================
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Investments in Real Estate Limited Partnerships (continued)
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------------
(In thousands)
<S> <C> <C>
Condensed Balance Sheets Information
Cash and investments $ 124,194 $ 111,034
Receivables and deposits 75,144 26,762
Other assets 38,428 37,231
Real estate 2,167,817 1,450,794
Less accumulated depreciation (843,658) (635,942)
-----------------------------------
Net real estate 1,324,159 814,852
-----------------------------------
Total assets $1,561,925 $ 989,879
===================================
===================================
Mortgage notes payable $1,262,049 $ 706,594
Other liabilities 55,668 47,353
-----------------------------------
Total liabilities 1,317,717 753,947
Partners' capital 244,208 235,932
-----------------------------------
$1,561,925 $ 989,879
===================================
</TABLE>
At December 31, 1997 the unamortized excess of the Company's investments over
the historical cost of the underlying net assets of the investees was
approximately $125.1 million which has been attributed to the fair values of the
investees' underlying properties and is being depreciated over their useful
lives.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Accrued and Sundry Liabilities
December 31
1997 1996
-----------------------------------
-----------------------------------
(In thousands)
Estimated acquisition liabilities $ 13,993 $ 2,320
Employee compensation 31,758 14,275
Deferred taxes 24,865 10,617
Legal reserve 4,000 -
Deferred revenue 2,296 1,476
Accrued vacation 1,501 1,308
Other 23,596 10,745
-----------------------------------
$102,009 $40,741
===================================
9. Notes Payable
During 1997, to better position the Company in the acquisition market, the
Company completed an amendment to its revolving credit facility, increasing the
credit limit from $200 million to $275 million. The amended revolving credit
facility involves a syndicate of 15 national and international financial
institutions. The revolving credit facility bears interest at the annual rate of
either prime plus an applicable margin ranging from 1/4 - 3/4%, the Federal
Funds Rate, as defined, plus an applicable margin ranging from 1/4 - 3/4%, or
LIBOR plus an applicable margin ranging from 1.5 - 2%, at Insignia's option and
terminates on March 19, 2000 unless extended. At December 31, 1997, all of the
outstanding amounts were subject to the LIBOR based rate. The Company also must
pay an unused commitment fee of either .25% or .375% on the average unused
balance for each quarter. The facility is secured by a pledge of the stock of
all material subsidiaries and a negative pledge on all of the Company's service
fee contracts and limited partner interests in real estate limited partnerships.
The outstanding balance on the revolving credit facility as of December 31, 1997
was $144,000,000.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Notes Payable (continued)
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------------
-------------------------------------
(In thousands)
<S> <C> <C>
Revolving credit facility with interest only due quarterly at LIBOR plus 1.75%.
Final payment due date is March 19, 2000 with
possible extension to December 11, 2000. $144,000 $43,000
Realty One affiliate First Ohio Mortgage Corporation maintains a $15
million line of credit with a bank that expires on April 30, 1998. The credit
line is collateralized by substantially all assets of First Ohio Mortgage
Corporation and guaranteed by companies affiliated through common ownership.
Repayment of each advance is due within fourteen business days of the
funding. Advances on the line of credit can only be drawn with evidence of a
committed residential mortgage and any one line of credit cannot be used to
fund any single residential mortgage in excess of $400,000. The rate on the
credit line is equal to the prime rate. 12,495 -
Realty One revolving credit agreement with a bank for $5.5 million,
collateralized by the property and receivables of Realty One. Monthly
interest payments are due at Realty One's option of three rates (i) the prime
rate, (ii) the bank's Money Market rate plus a specified margin as defined,
or (iii) the bank's Cost of Funds rate plus 2.5%. The rate at December 31,
1997 was 6.4%. Advances on the credit line are due at the maturity date of
September 30, 1999.
3,500 -
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Notes Payable (continued)
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------------
-------------------------------------
(In thousands)
<S> <C> <C>
Realty One term loan with a bank, with a $4.5 million borrowing limit,
collateralized by Realty One's property and receivables. The term loan is
payable in monthly installments of $75,000 plus interest at Realty One's
option of three rates (i) the prime rate, (ii) the bank's Money Market rate
plus a specified margin, as defined, or (iii) the bank's Cost of Funds rate
plus 2.5%. The rate at December 31, 1997 was 6.4%.
The maturity date is June 1, 2001. $ 2,625 $ -
Unsecured convertible notes bearing interest at 10% with quarterly interest
payments. Principal is payable in full at maturity date of April 30, 1998
along with any unpaid interest. 2,000 2,000
Term note, secured by equipment, bearing simple interest at
prime plus 1/4% with principal being paid equally in 60 monthly
installments of $58,333 plus interest. Last
scheduled payment is January 15, 2000. 1,458 2,158
Realty One affiliate, Corporate Relocation Management, maintains a revolving
line of credit agreement for $3 million that is collateralized by accounts
receivable and the option of the bank to record first and/or second mortgages
on any acquired properties. The outstanding balance is due on demand. The
interest rate on the credit line was approximately 8.2% at December 31, 1997. 1,349 -
Note payable bearing simple interest of 6.25% per annum
with principal and interest paid monthly. Last scheduled payment is
December 19, 2000. 1,322 1,711
Unsecured nonrecourse note payable bearing simple interest
at a rate of 6.5% per annum. - 430
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Notes Payable (continued)
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------------
-------------------------------------
(In thousands)
<S> <C> <C>
Two promissory notes payable bearing interest at LIBOR plus a margin of
1.75%with quarterly interest payments.
Principal is payable in full on April 29, 2012. $ 528 $ -
Purchase money note at a rate per annum of 8% with
quarterly principal and interest payments. The note
matures on April 1, 2000 and is secured by assignment
of certain general and limited partnership interests. 1,847 2,568
Realty One, other notes with interest rates from 5.1% - 7.7% due at various
times through 2001. 922 -
Unsecured note bearing interest at 8% payable quarterly beginning June
1993. Principal is payable in ten equal
semi-annual payments beginning June 1993. The note matured in December
1997. - 437
Secured promissory note bearing simple interest of 7% per
annum due on the last day of the year in 5 equal installments of principal
plus interest. Maturity date is December 31, 1999. 40 60
-------------------------------------
Subtotal 172,086 52,364
Less prepaid points (1,682) (2,524)
-------------------------------------
$170,404 $49,840
=====================================
<FN>
The non-recourse mortgage note payable of $19,300,000 bears interest at 7.33%
payable monthly. Principal is payable at maturity. Maturity date is November 1,
2003. The mortgage note is secured by the underlying apartment property.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Notes Payable (continued)
The Company paid interest of approximately $4,466,000 (1997), $11,346,000 (1996)
and $6,516,000 (1995).
Scheduled principal maturities on notes payable after December 31, 1997 are as
follows (thousands of dollars):
1998 $ 19,009
1999 3,149
2000 149,301
2001 99
2002 -
Later years 528
-----------------
$172,086
=================
Certain of the Company's note agreements contain various restrictive covenants
requiring, among other things, minimum consolidated net worth, minimum
liquidity, and various other financial ratios.
The Company is in compliance with its restrictive covenants.
10. Subordinated Convertible Note Payable
In connection with the Gordon Realty acquisition in 1994, Insignia issued a
convertible subordinated note of $10,000,000 with interest at 7.5%, due January
17, 2002. The note was converted to 1,117,732 shares of Class A Common Stock on
April 29, 1996.
11. Redeemable Cumulative Convertible Preferred Stock
On January 17, 1995, the Company sold 15,000 shares of redeemable cumulative
convertible preferred stock (voting) to Apollo Real Estate Advisors, LP
("Apollo") for $15,000,000. On March 29, 1996, the Company notified Apollo of
its intention to call for the redemption of the 15,000 shares of preferred
stock. The preferred stock was converted to 1,509,062 shares of Class A Common
Stock on April 29, 1996.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Trust Based Convertible Preferred Securities
In November 1996, Insignia Financing I, a Delaware trust and a consolidated
subsidiary of the Company (the "Trust"), issued and sold 2,990,000 shares of
Trust Based Convertible Preferred Securities (the "Securities") with an
aggregate liquidation amount of $149,500,000, sold pursuant to exemptions under
the Securities Act of 1933, as amended, and the rules thereunder. All of the
outstanding common securities of the Trust are owned by the Company. The sole
asset of the Trust is the $154.1 million principal amount of 6.5% convertible
subordinated debentures of the Company due September 30, 2016. The Company has
certain obligations relating to the Securities which amount to a full and
unconditional guarantee of the Trust's obligations under the Securities. The
debentures issued and the common securities purchased by the Company are
eliminated in the balance sheet. The Securities will mature on September 30,
2016 and require distributions at the rate of 6.5% per annum, with quarterly
distributions payable in arrears. The Company has the option to defer
distributions from time to time, not to exceed 20 consecutive quarters. The
Company made distributions of $10,003,000 and $1,619,000 for 1997 and 1996,
respectively, which are reflected in minority interests in the consolidated
statements of income. The Securities are convertible into the Company's Class A
Common Stock at $26.50 per share through September 30, 2016 or upon the
Company's option to redeem the Securities after November 1, 1999. The Securities
are structured such that the distributions are tax deductible to the Company.
The proceeds of the offering were used to pay down debt under the revolving
credit facility.
Discounts and offering costs, net of accumulated amortization, of approximately
$5,435,000 and $5,331,000 at December 31, 1997 and 1996, have been netted
against the Securities and are being amortized over the term of the Securities.
13. Stockholders' Equity
Common Stock, Preferred Stock and Retained Earnings
Effective December 31, 1995, the Company issued a two-for-one stock split
effected in the form of a stock dividend of the Company's Class A Common Stock.
All share related data for the year ended December 31, 1995 has been restated to
give effect to the stock split.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stockholders' Equity (continued)
In October 1995, the Company completed a public offering in which 3,850,000
shares of Class A Common Stock were sold by the Company and 1,350,000 shares
were sold by certain stockholders of the Company. The gross selling price of the
stock was $14.50 per share. The Company received approximately $57,600,000,
including proceeds from options exercised in anticipation of the offering, in
cash after the payment of certain underwriting costs. The proceeds were used to:
1) repay the majority of its long-term indebtedness, and 2) fund in part the NPI
acquisition.
IPT's declaration of trust has authorized the issuance of up to 400,000,000
common shares and 100,000,000 preferred shares of beneficial interest. A private
offering was completed in August 1997 with a total of 5,231,000 common shares
issued at $10.00 per share. IPT also granted to certain potential investors an
option to purchase for cash up to 1,000,000, in the aggregate, common shares of
beneficial interest of IPT, at any time on or before October 10, 1997, at the
price of $10 per share, provided that the purchaser is not in breach of certain
covenants at the time of the purchase. This option was exercised during 1997.
IPLP had 26,972,650 and 19,567,535 units outstanding at December 31, 1997 and
1996, respectively, which may be redeemed, subject to certain restrictions, for
an equivalent number of common shares of IPT.
The Company's ability to pay dividends is subject to restrictions contained in
its revolving credit facility. At December 31, 1997, the Company has
unrestricted stockholders' equity of $55,182,000. At December 31, 1997,
approximately $8,300,000 of the Company's retained earnings is represented by
undistributed earnings of the companies underlying the investments in real
estate limited partnerships that are accounted for by the equity method.
The Company had 2,813,366 (1997) outstanding warrants to acquire shares of Class
A Common Stock of the Company, with exercise prices ranging from $7 - $29 and
expiration dates from 1999 - 2003.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stockholders' Equity (continued)
Stock-Based Compensation
The Company's 1992 Stock Incentive Plan (the "Plan") has authorized the grant of
options to management personnel for up to 5,250,000 shares of the Company's
common stock. The term of each option will be determined by the Company's Board
of Directors but will not be more than ten years from the date of grant. The
Plan may be terminated by the Board of Directors at any time. Options granted
typically have five year terms and vest ratably over a five-year period. Options
are granted at prices not less than 100% of the fair market value of the Class A
Common Stock at the date of grant.
The Company's 1995 Non-Employee Director Stock Option Plan (the "Directors
Plan") has authorized the grant of options for up to 500,000 shares of the
Company's Class A Common Stock. The terms of the Directors Plan are similar to
the Plan.
The Company assumed 1,482,879 options under Non-Qualified Stock Option
Agreements in connection with the acquisition of Edward S. Gordon Company
Incorporated and Edward S. Gordon Company of New Jersey, Inc. The options
granted are vested and have 5 year terms.
The Company had 240,800 (1997) outstanding restricted stock awards to acquire
shares of Class A Common Stock of the Company. These awards, which have a 5 year
vesting period, were granted to officers and other employees of the Company in
1997. Total compensation expense of $550,000 was recognized by the Company in
1997 for these awards.
During 1997, Insignia approved the repricing of certain employee stock options
issued during 1996. The 274,900 options involved were issued primarily to new
employees joining the Company through acquisitions. The repriced options have an
exercise price of $17.50 per share over the five year vesting period, compared
to a weighted average exercise price of $23.65 prior to repricing. In addition,
the Company's shareholders approved amendments to the Certificate of
Incorporation, as previously amended, authorizing 50 million additional shares
of Class A Common Stock, par value $0.01 per share.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stockholders' Equity (continued)
In August 1997, IPT adopted the 1997 Share Incentive Plan (the "IPT Plan") to
provide for the granting of share options and restricted shares to certain key
employees (including officers), directors, consultants and advisors of IPT,
including certain employees of Insignia. The IPT Plan will be administered by
the Board of Trustees of IPT or a committee of the Board of Trustees. The IPT
Plan provides that options granted may be "incentive share options" (as defined
in the Code), non-qualified options or restricted shares, which vest on the
attainment of performance goals or subject to vesting requirements or other
restrictions prescribed by the Board of Trustees. The maximum number of IPT
common shares available for awards is 1,200,000 shares, subject to adjustment
under certain circumstances. The IPT Plan may be terminated by the Board of
Trustees of IPT at any time.
The exercise price of options granted under the IPT Plan may not be less than
100% of the fair market value of an IPT common share on the date of grant.
However, an incentive share option granted to the holder of more than 10% of the
total combined voting power of all of the shares of beneficial interest of IPT
or any subsidiary must have an exercise price of at least 110% of the fair
market value of the shares on the date of grant and the option by its terms must
not be exercisable after the expiration of five years from the date it is
granted. Absent a public market for the IPT common shares, the IPT Plan provides
for the fair market value to be determined by the Board of Trustees (or a
committee thereof if one has been appointed to administer the IPT Plan).
An option may not be granted with a term exceeding ten years (five years in the
case of incentive stock options granted to a holder of more than 10% of the
total voting power of all classes of IPT's capital stock on the date of the
grant). Options may be exercised by paying the purchase price in cash or, if the
option agreement permits, wholly or partly in IPT common shares already owned by
the optionee.
At or prior to the exercise of a nonqualified share option, the IPT Board will
have the discretion to permit the optionee, in lieu of purchasing the entire
number of shares subject to purchase under the option, to relinquish all or part
of the unexercised portion of the option for cash in the amount of the
difference between the aggregate value of the shares subject to the option and
the aggregate exercise price of the option. At the discretion of the optionee,
this amount may be paid in IPT common shares.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stockholders' Equity (continued)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock based compensation because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options and warrants. Under APB 25, because the exercise price of the Company's
employee stock options and warrants equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options and warrants granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options and warrants was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
1997 1996 1995
--------------------------------
Risk-free interest rate 5.4% 6.2% 6.2%
Dividend yield N/A N/A N/A
Volitility factors of the expected market price .45 .40 .42
Weighted-average expected life of the options 3.72 3.25 3.25
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting restrictions and
are fully transferable. In addition, option valuation models required the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and warrants have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and warrants.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stockholders' Equity (continued)
For purposes of pro forma disclosures, the estimated fair values of the options
and warrants are amortized to expense over the options' and warrants' vesting
period. The Company's pro forma information follows (in thousands, except for
earnings per share information):
1997 1996 1995
--------------------------------
Pro forma net income $6,802 $3,154 $1,208
Pro forma earnings per share - basic .23 .10 .05
Pro forma earnings per share - diluted .22 .10 .05
Because FAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect was not fully reflected in 1996 and 1995.
Summaries of the Company's stock option and warrant activity, and related
information for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 7,831,558 $11.26 5,904,884 $10.52 2,094,094 $ 7.62
Granted 1,196,700 14.90 881,000 23.97 4,038,128 11.68
Assumed in connection with ESG
acquisition 1,482,879 5.79 - -
Exercised 1,258,404 6.42 352,637 6.97 214,804 4.10
Forfeited/canceled 592,816 20.27 84,568 12.69 12,534 9.46
------------ ----------- ------------- ----------- -------------- -----------
Outstanding at end of year 7,177,038 $12.07 7,831,558 $11.26 5,904,884 $10.52
Exercisable at end of year 4,670,004 $10.65 4,982,633 $ 9.02 2,795,972 $ 9.08
Weighted-average fair value of
options granted during the
year $ 7.56 $ 8.56 -
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stockholders' Equity (continued)
Significant option and warrant groups outstanding at December 31, 1997 and
related weighted average price and life information follows:
<TABLE>
<CAPTION>
Options/Warrants
Options/Warrants Outstanding Exercisable
- ------------------------------------------------------------------------------------- ----------------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -------------------------------- ---------------- --------------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$0.00 to $5.00 343,933 3 years $ 0.74 103,133 $ 2.48
$5.01 to $10.00 3,240,221 2 years 8.36 2,838,867 8.18
$10.01 to $15.00 2,161,824 4 years 13.70 1,449,484 13.74
$15.01 to $20.00 854,560 4 years 18.12 158,520 19.03
$20.01 to $25.00 246,500 5 years 21.04 2,000 21.00
$25.01 to $29.00 330,000 4 years 27.29 118,000 27.71
---------------- ------------- --------------- ------------
7,177,038 $12.07 4,670,004 $10.65
================ ============= =============== ============
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Purchased intangibles $(28,769) $(11,166)
Tax over book depreciation (2,512) (1,572)
Partnership earnings differences (3,294) (1,913)
Compensation and benefits - (601)
---------------------------------
Total deferred tax liabilities (34,575) (15,252)
Deferred tax assets:
Compensation and benefits 2,664 96
Other, net 5,190 2,811
State income tax credits 853 774
Net operating losses 2,082 1,824
---------------------------------
Total deferred tax assets 10,789 5,505
Valuation allowance for deferred tax assets (1,079) (870)
---------------------------------
Deferred tax assets, net of valuation allowance 9,710 4,635
---------------------------------
Net deferred tax (liabilities) $(24,865) $(10,617)
=================================
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
Significant components of the provision for income taxes, including the income
tax provision for extraordinary items, are as follows:
1997 1996 1995
-----------------------------------------------
(In thousands)
Current (payable):
Federal $ 9,267 $ 6,889 $4,592
State 1,599 877 (213)
-----------------------------------------------
Total current 10,866 7,766 4,379
Deferred:
Federal (3,595) (2,298) (650)
State (449) (218) (170)
-----------------------------------------------
Total deferred (4,044) (2,516) (820)
-----------------------------------------------
$ 6,822 $ 5,250 $3,559
===============================================
The reconciliation of income tax attributable to continuing operations computed
at the U.S. statutory rate to income tax expense is shown below (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $5,969 35.0% $4,835 35.0% $3,280 35.0%
Effect of incremental tax rates - - - - (102) (1.1)
State income taxes, net of Federal
tax benefit 582 3.4 688 5.0 367 3.9
Tax credits (189) (1.1) - - - -
Effect of permanent differences (798) (4.7) (333) (2.4) 80 0.9
Change in valuation reserve 205 1.2 - - 18 0.2
Change in state tax rates 691 4.1 - - - -
Other 362 2.1 60 0.4 (84) (.9)
------------------------- ------------------------- -------------------------
$6,822 40.0% $ 5,250 38.0% $3,559 38.0%
========================= ========================= =========================
<FN>
Income taxes paid in 1997, 1996 and 1995 were $16,279,000, $4,756,000 and
$7,048,000, respectively. Income taxes payable of $1,916,000 (1996) are included
in accrued and sundry liabilities. Income taxes receivable of $4,488,000 (1997)
are included in receivables.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
As a result of the acquisition of Paragon Group Properties Services, Inc., the
Company acquired use of net operating losses of approximately $5,000,000. These
losses carryforward to the calendar year ended December 31, 2010. The
carryforward is subject to provisions of the Internal Revenue Code, which limit
the use of the carryforward to the lesser of the value of the stock multiplied
by the Federal long-term tax-exempt rate or the subsidiary's income.
15. Commitments, Contingencies and Other Matters
Litigation
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 ("Release Fee") 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, and the
Government has until March 13, 1998, to determine whether it will challenge any
of the conduct voluntarily disclosed by the Company. The parties have agreed
that, in the event of a dispute, the parties will attempt to resolve that
dispute through mediation. To date the Government has not made any determination
pursuant to the agreement challenging any of the Company's disclosures.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
Including the $5 million Release Fee, 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 representing the estimated
future costs associated with its management of such properties. The Company does
not anticipate further costs beyond those already incurred and accrued. (See
Note 20 for further discussion).
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 complaint, AFC
and affiliates allege a number of claims sounding principally in
indemnification. The Government has filed an opposition to that motion. On
February 3, 1998, the Court denied AFC's motion to implead.
1997 Tender Offer Litigation. In August 1997, IPLP Acquisition I LLC, a
wholly-owned subsidiary of IPLP (the "Purchaser"), commenced tender offers for
limited partner interests in six partnerships: Century Property Fund XVII,
Century Property Fund XIX, Century Property Fund XXII, National Property
Investors 4, Consolidated Capital Properties IV and Fox Strategic Housing Income
Partners (the "Tender Partnerships").
On September 5, 1997, City Partnerships Co., a partnership claiming to own
partnership units in the Tender Partnerships, filed a complaint with respect to
a purported class action and derivative suit in the Court of Chancery in the
State of Delaware in and for New Castle County (the "City Partnerships
Complaint") seeking, among other things, compensatory damages, a declaration
that the defendants have breached their fiduciary duties to the limited partners
of the Tender Partnerships, an order directing the defendants to carry out their
fiduciary duties and an order enjoining the tender offers. The City Partnerships
Complaint, which names as defendants the Purchaser, Insignia, IPLP and the
Tender Partnerships, contains allegations that, among other things, the
defendants have intentionally mismanaged the Tender Partnerships and acted
contrary to the limited partners' best interests by manipulating the limited
partners into selling their units pursuant to the tender offers for
substantially lower prices than the units are worth. In the City Partnerships
Complaint, the plaintiffs also allege that, as a result of the tender offer and
in light of the acknowledged conflict of interest between the Purchaser and the
general partners, Insignia breached its duty to provide an independent analysis
of the fair market value of the units sought in the tender offer materials. The
City Partnerships Complaint contains further allegations that the defendants
failed to appoint a disinterested committee to review the tender offer, and
therefore did not adequately consider other alternatives available to the
limited partners (such as a liquidation or auction of the Tender Partnerships or
their assets), resulting in an offer that may not be in the best interest of the
Tender Partnerships and the limited partners.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
On September 8, 1997, persons claiming to own limited partnership units in the
Tender Partnerships filed a complaint with respect to a purported class action
and derivative suit in the Superior Court for the State of California for the
County of San Mateo (the "Kline Complaint") seeking, among other things, an
order requiring corrections to the disclosures in the offer documents and
enjoining the offers, an order requiring the defendants to discharge their
fiduciary duties to the limited partners of the Tender Partnerships by seeking
other transactions that would maximize value for the limited partners of the
Tender Partnership and compensatory damages. The Kline Complaint named as
defendants the Purchaser, Insignia, IPT, IPLP, the Tender Partnerships, their
Insignia-affiliated general partners, and one individual who is an officer and
director of Insignia. The Kline Complaint contains allegations that, among other
things, the defendants have intentionally mismanaged the Tender Partnerships and
acted contrary to the limited partners' best interests, through use of
non-public material information gained as a result of the relationship between
the Purchaser and the general partners of the Tender Partnerships, in order to
prolong the lives of the Tender Partnerships and thus continue the revenue
derived by Insignia from the Tender Partnerships, while at the same time
reducing the demand for the Tender Partnerships' units in the limited resale
market for the units by artificially depressing the trading prices for the units
in order to create a favorable environment for the tender offers. In the Kline
Complaint, the plaintiffs also allege that, as a result of the tender offers,
the Purchaser will acquire effective voting control over the Tender Partnerships
at highly inadequate prices, and that the tender offer documents contain
numerous false and misleading statements and omissions of material facts. The
alleged misstatements and omissions concern, among other things, the advantages
to limited partners of tendering units pursuant to the tender offers, the
description of the estimated liquidation values in the offer documents and the
estimated expenses that were taken into account in computing that Value; the
true financial condition of the Tender Partnerships and the ability to sell or
refinance any of the Tender Partnerships' properties; the factors affecting the
likelihood that properties owned by the Tender Partnerships will be sold or
liquidated in the near future; the liquidity and value of the units; the limited
secondary market for units; and the true nature of the market for the underlying
assets. On September 24, 1997, the Court denied plaintiffs' application for a
temporary restraining order and for preliminary injunctive relief prohibiting
the Purchaser from proceeding with the tender offers.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
On September 10, 1997, persons claiming to own limited partnership units in the
Tender Partnerships filed a complaint with respect to a purported class action
and derivative suit in the Superior Court for the State of California for the
County of Alameda (the "Heller Complaint") seeking, among other things, an order
enjoining the tender offers, an order requiring the defendants to discharge
their fiduciary duties to the limited partners of the Tender Partnerships by,
among other things, engaging independent persons to act in the best interests of
the limited partners and by seeking other transactions that would maximize value
for the limited partners, an order requiring the defendants to explore other
alternatives to the tender offers and compensatory damages. The Heller Complaint
names as defendants the Purchaser, Insignia, IPLP, IPT, the Tender Partnerships
and their Insignia-affiliated general partners. The Heller Complaint contains
allegations that, among other things, the defendants have intentionally
mismanaged the Tender Partnerships and acted contrary to the limited partners'
best interests, through use of non-public material information gained as a
result of the relationship between the Purchaser and the general partners of the
Tender Partnerships, and failed to adequately consider other alternatives
available to the Tender Partnerships, such as a sale or liquidation of the
Tender Partnerships' properties, or to hire an independent person to advise the
general partners as to such alternatives. In the Heller Complaint, the
plaintiffs also allege that, as a result of the tender offers, the Purchaser
will acquire effective voting control over the Tender Partnerships at highly
inadequate prices, and that the tender offer documents contain numerous false
and misleading statements and omissions of material facts. The alleged
misstatements and omissions concern, among other things, the advantages to
limited partners of tendering units pursuant to the tender offers; the true
financial condition of the Tender Partnerships and the ability to sell or
refinance any of the Tender Partnerships' properties; the factors affecting the
likelihood that properties owned by the Tender Partnerships will be sold or
liquidated in the near future; the liquidity and value of the units; the limited
secondary market for units; the true nature of the market for the underlying
assets; and the true intentions of Insignia and its affiliates with respect to
the units.
The Company believes that the allegations contained in the City Partnerships
Complaint, the Kline Complaint and the Heller Complaint are without merit and
intend to vigorously contest the plaintiffs' actions. (See Note 20 for further
discussion).
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
1996 Tender Offer Litigation. In May 1996, Walton Street Capital Acquisition II,
MLLC ("Walton Street"), together with certain Insignia affiliates, commenced
tender offers for limited partner interests in ten real estate limited
partnerships syndicated by The Balcor Company ("Balcor"). In May 1996, certain
persons claiming to be holders of limited partner interests commenced a lawsuit
entitled Chipain, Tom, v. Walton Street Capital Acquisition II, LLC,. in the
Circuit Court of Cook County, Illinois, County Department, Chancery Division, on
behalf of themselves, on behalf of a putative class of plaintiffs, and, as
amended, derivatively on behalf of the Balcor-syndicated partnerships,
challenging the actions of the defendants (including Insignia, and 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.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
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.
The Company and certain subsidiaries are defendants in lawsuits arising in the
ordinary course of business. Such lawsuits are primarily insured claims arising
from accidents at managed properties. Claims may demand substantial compensatory
and punitive damages.
Management believes that the aforementioned lawsuits will be resolved without
material loss to the Company or its subsidiaries.
Environmental Liabilities
Under various Federal and state environmental laws and regulations, a current or
previous owner or operator of real estate may be required to investigate and
clean up certain hazardous or toxic substances or petroleum product releases at
the property, and may be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
such parties in connection with contamination. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs it incurs in connection with the contamination. The owner or
operator of a site may be liable under common law to third parties for damages
and injuries resulting from environmental contamination emanating from the site.
There can be no assurance that the Company, any of its affiliates, or any assets
owned or controlled by the Company or any of its affiliates currently are in
compliance with all of such laws and regulations, or that the Company or its
affiliates will not become subject to liabilities that arise in whole or in part
out of any such laws, rules, or regulations. Management is not currently aware
of any environmental liabilities which are expected to have a material adverse
effect on the Company's operations or financial condition.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
Operating Leases
The Company leases office space and equipment under noncancelable operating
leases. Minimum annual rentals under operating leases for the five years ending
after December 31, 1997 are as follows (in thousands):
1998 $17,567
1999 15,150
2000 13,156
2001 10,925
2002 9,047
Thereafter 19,767
-----------------
Total minimum payments required $85,612
=================
Rental expense was approximately $12,307,269 (1997), $7,753,000 (1996) and
$4,726,000 (1995).
Certain of the leases are subject to annual escalation based on the Consumer
Price Index or annual increases in operating expenses. The Company's
headquarters lease contains two renewal options of five years each.
Retirement Plan
The Company established a 401(k) savings plan covering substantially all of its
employees. The Company may make a contribution equal to 50% of the employees'
contribution up to a maximum of 3% of the employees' compensation and
participants fully vest in employer contributions after 5 years. The Company
expensed $1,990,000, $1,506,000 and $855,000 in contributions to the Plan during
1997, 1996 and 1995, respectively.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
Department of Housing and Urban Development ("HUD")
Approximately 13% of the residential units managed by the Company were housing
projects subsidized under various government programs administered by the United
States Department of Housing and Urban Development ("HUD"). As a result, certain
aspects of Insignia operations are subject to regulation by HUD. 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.
Property Dispositions
In November 1994, the Company acquired substantially all of the assets
(consisting primarily of management contracts) of Allegiance Realty Group, a
wholly owned subsidiary of the Balcor Company, Inc. ("Balcor"). Balcor announced
in the second quarter of 1996 its intention 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 based
on the property sales for services rendered in the sales transactions. The
Advisory Agreements have terms of one year and the fees range from .75% to 1.25%
of the sales price of the property. The fees are and will continue to be paid in
cash after the close of each transaction. Management believes that the
unamortized purchase price relating to properties managed for Balcor properly
reflects the asset value and that no impairment exists.
General Partners
The qualified REIT subsidiaries of IPT either control or serve as general
partner in limited partnerships and these subsidiaries may be liable for
recourse obligations of the limited partnerships if the limited partnerships
were unable to satisfy those obligations. IPT believes that each limited
partnership has more than adequate resources to discharge all recourse
obligations and maintain adequate insurance.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Commitments, Contingencies and Other Matters (continued)
Commitments
In connection with the NPI acquisition, Insignia assumed outstanding commitments
under arrangements established prior to the acquisition. Under the terms of the
arrangements, Insignia may be obligated to loan up to $500,000 to certain
partnerships ($2,600,000 in aggregate) and $150,000 to certain other
partnerships ($6,000,000 in aggregate) at interest rates not to exceed prime
plus 2%. At December 31, 1997, no amounts were outstanding related to the
arrangements.
Obligations to Former General Partners
Each of the corporate general partners owned by IPT was acquired by Insignia
from unaffiliated prior owners. The acquisition agreements provided that
Insignia and IPT would be indemnified from claims attributable to events or
actions prior to their ownership, and Insignia (now IPT) indemnify the prior
owners from claims or causes of action arising after the change in ownership. In
addition, certain former owners of the general partners of seven limited
partners retained the obligation with respect to 100% (and in some instances
75%) for capital contributions that may be required by the general partners upon
windup of the applicable partnerships.
Angeles Mortgage Investment Trust Merger
On July 18, 1997, IPT entered into a definitive merger agreement to merge with
Angeles Mortgage Investment Trust ("AMIT"). The definitive agreement provides
that each AMIT Class A share will be exchanged for 1.625 IPT common shares and
each outstanding AMIT Class B share will be exchanged for 0.033 IPT common
shares. The exchange ratios will be appropriately adjusted based on the
respective amounts of per-share dividends declared or paid by AMIT since January
1, 1997 and by IPT since January 31, 1997. The proposed transaction is
contingent upon, among other conditions, AMIT's receipt of a fairness opinion
and the approval of the proposed transaction by certain governmental authorities
and by the shareholders of AMIT.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Related Party Transactions
Metropolitan Asset Enhancement, L.P. ("MAE")
The Company holds a 19.1% limited partnership interest in MAE. MAE was formed in
December 1990 to be the principal vehicle for acquiring general partner
interests in limited partnerships owning real estate and real estate related
assets that would be managed or serviced by the Company. The Chairman, Chief
Executive Officer, and President of the Company is the sole stockholder of the
general partner of MAE, which has a 1% general partnership interest in MAE.
In August 1993, the Company entered into an agreement with MAE ("MAE Agreement")
whereby: 1) the Company agreed to assist MAE as its advisor and agent in
connection with MAE's acquisition, asset management, property management, and
securitization activities and in connection therewith to perform all related
services; 2) the Company agreed to render to MAE full investment banking,
financial advisory, recapitalization, asset restructuring, securitization and
mortgage banking services (as sole compensation for the provision of such
services, the Company receives incentive management fees, transaction fees, and
cost reimbursements, as defined in the MAE Agreement); and 3) the Company and
MAE agreed that, in the event either obtains an opportunity to acquire interests
in real estate or in entities which own or control real estate, the Company will
have the first right to acquire such interests. The Company and MAE have also
agreed that if the Company elects not to acquire any such interests, but MAE
does elect to acquire such interests and the Company elects to provide any
financing to MAE for such acquisition, then such financing will be by means of
loans that will bear interest at a rate equal to the rate then paid by the
Company on indebtedness under a revolving credit facility. If the Company is not
a party to a revolving credit facility, such rate will be the estimated rate the
Company would pay on indebtedness incurred under a revolving credit facility. As
a result of the MAE GP merger, as discussed in Note 20, the MAE Agreement has
been terminated.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Related Party Transactions (continued)
During 1997, 1996 and 1995, the Company was paid investment banking fees in the
amount of $212,000, $860,000 and $808,000 in connection with services rendered
to MAE and its various subsidiaries.
The Company has made loans to MAE or an MAE affiliate. All advances accrue
interest at prime plus 1% and repayment is made through cash generated by the
underlying property or investment. The outstanding balance of these advances was
$166,000 for 1997 and $529,000 for 1996, which are included in notes receivable
from affiliates.
Winthrop Financial Associates ("WFA")
On October 27, 1997, Insignia consummated a transaction with WFA, which is
controlled by Apollo Real Estate Investment Fund, L.P., a shareholder of the
Company, and certain affiliates of WFA whereby Insignia acquired, among other
things, limited partner interests in, or the right to acquire units of limited
partner interests in certain real estate limited partnerships (the "Winthrop
Partnerships"), and the right to receive certain asset management, investor
services and partnership management fees from these Partnerships ("Winthrop
Fees").
The Winthrop Partnerships are controlled by WFA. In connection with the
foregoing transaction, IPT I LLC, a Delaware limited liability company which is
owned 90.1% by Insignia and 9.9% by IPT, acquired an associate general partner
interest in WFA, as a result of which IPT I LLC has the power to effectively
control all property management decisions relating to the properties owned by
six of the Winthrop Partnerships. Insignia also acquired all of the newly-issued
Class B stock of First Winthrop Corporation ("FWC"), which immediately prior
thereto was a wholly-owned subsidiary of WFA, as a result of which Insignia has
the right to appoint the two Class B directors of FWC, who in turn have the
power to effectively control all property management decisions relating to the
properties owned by the other seven Winthrop partnerships. In addition, IPT I
LLC and Insignia caused the respective general partners of the Winthrop
Partnerships to subcontract with IPGP Corporation, a wholly-owned subsidiary of
Insignia ("IFGP"), to perform the asset management and other services in respect
of which the Winthrop Fees are payable on behalf of such general partners, in
exchange for which IFGP was assigned the rights to receive the Winthrop Fees.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Industry Segments
Insignia is a fully integrated real estate services company, which currently
operates in principally three business segments, including the following: (1)
property services, (2) financial services and (3) real estate ownership. The
property services business segment provides property and asset management
services, partnership accounting, investor relations, leasing and brokerage, and
tenant representation services to both affiliates and non-affiliates of the
Company. The financial services business segment originates loans, brokers real
estate, coordinates real estate workouts, and is responsible for merger and
acquisition activity for the Company, including co-investment partnership
formations, portfolio acquisitions, and limited partnership tender offer
acquisitions. The real estate business segment consists of the operations of IPT
and co-investment partnerships in which the Company has significant investments.
The following table summarizes certain information by industry segment:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Identifiable assets:
Property services $467,179 $251,764 $106,107
Financial services 3,451 908 2,877
Real estate 282,334 179,879 60,473
Other 47,259 59,851 75,952
----------------------------------------------
$800,223 $492,402 $245,409
==============================================
Gross revenues and equity earnings:
Property services $382,470 $208,139 $110,833
Financial services 5,878 9,309 6,842
Real estate 18,827 10,037 2,461
Other 3,695 3,179 5,357
----------------------------------------------
$410,870 $230,664 $125,493
==============================================
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Industry Segments (continued)
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating profit (loss):
Property services $ 36,503 $ 30,732 $ 22,676
Financial services (5,480) (1,119) (3,509)
Real estate 13,917 6,026 2,445
Other (6,084) (3,987) (4,339)
----------------------------------------------
38,856 31,652 17,273
Interest (7,867) (12,918) (7,049)
Apartment property interest (1,486) (1,812) -
Minority interests (12,448) (1,976) (131)
----------------------------------------------
$ 17,055 $ 14,946 $ 10,093
==============================================
Depreciation and amortization expense:
Property services $ 30,828 $ 22,478 $ 12,908
Financial services 21 35 40
Real estate 285 - -
Other 575 518 545
----------------------------------------------
$ 31,709 $ 23,031 $ 13,493
==============================================
Capital expenditures:
Property services $ 6,232 $ 6,243 $ 3,189
Financial services 130 68 16
Real estate 401 732 -
Other 1,733 469 202
----------------------------------------------
$ 8,496 $ 7,512 $ 3,407
==============================================
</TABLE>
Real estate assets include investments in unconsolidated equity method investees
totaling $215.7 million and real estate revenues include equity earnings of
approximately $10 million. These investees represent limited partnerships owning
real estate consisting of residential apartments and commercial property
throughout the United States.
Other assets include primarily cash and property and equipment. Other revenues
consisted primarily of interest income on short-term investments. Other expense
includes general corporate administration, professional fees and depreciation.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Industry Segments (continued)
The financial services segment derived approximately $731,350 (1996) and
$1,862,000 (1995) of its revenues under an exclusive representation of a major
life insurance company.
Property services revenues include $2,574,000 (1997), $16,189,000 (1996) and
$20,165,000 (1995) of property management revenues from properties controlled by
The Balcor Company and $680,000 (1997), $1,520,000 (1996) and $1,190,000 (1995)
of amounts received from an agency that serves as an insurance broker for
various partnerships managed by the Company.
18. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues $ 400,843 $ 146,213 $ 100,103 $ 86,615 $ 67,912
Net EBITDA 60,974 20,027 10,715 15,857 14,375
Equity earnings 10,027 4,137 2,254 569 3,067
Net income before extraordinary item
10,233 5,506 149 2,574 2,004
Net income 10,233 5,506 149 2,574 2,004
Per common share - assuming dilution:
Net income $.32 $.17 $.01 $.08 $.06
<FN>
Fourth quarter results of 1997 include a $5.2 million legal reserve.
Third quarter results of 1997 include a $5 million release fee paid to HUD.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Quarterly Financial Data (Unaudited) (continued)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues $227,074 $77,870 $65,885 $43,098 $40,221
Net EBITDA 47,713 16,222 9,998 11,654 9,839
Equity earnings 3,590 518 732 886 1,454
Net income before extraordinary item
9,266 4,246 252 2,648 2,120
Net income 8,564 3,544 252 2,648 2,120
Per common share - assuming dilution:
Income before extraordinary items
$.28 $.12 $.01 $.08 $.07
Net income .26 .10 .01 .08 .07
<FN>
Third quarter results of 1996 include a $935,000 charge for unsuccessful
acquisition costs.
</FN>
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Fair Values of Financial Instruments
The fair value estimates of financial instruments presented below are not
necessarily indicative of the amounts the Company might pay or receive in actual
market transactions. Potential taxes and other taxes have also not been
considered in estimating fair value. The carrying amount reported on the balance
sheet for cash approximates its fair value. Receivables reported on the balance
sheet consist of property and lease commission receivables, mortgage loans
receivable, income tax refunds, and various note receivables. The property
receivables and income tax refunds approximate their fair values. Lease
commissions receivable are carried at their discounted present value, therefore
the carrying amount and fair value amount are the same. The mortgage loans
receivable and notes receivable earn interest at either fixed or variable rates.
Interest rates approximate current market interest rates for similar
instruments, therefore, the carrying amount approximates their fair value. Notes
payable were analyzed individually to calculate fair value based on current
interest rates and market value, if applicable. The large revolving credit
facility note carries a variable rate of interest, and therefore, its carrying
value adjusted for the prepaid points approximates its fair value. The Trust
Based Convertible Preferred Securities were issued in November 1996 and the
Company believes the fair value has not changed significantly since issuance.
Summary
The carrying amounts and fair values of the Company's financial instruments at
December 31, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $88,847 $88,847 $ 54,614 $ 54,614
Receivables 45,342 45,342 12,668 12,668
Commissions receivable 76,838 76,838 33,372 33,372
Notes payable 170,404 174,772 49,840 54,864
Trust based convertible preferred securities 149,500 149,500 149,500 149,500
</TABLE>
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Subsequent Events
Litigation
In March 1998, the Company paid an additional $2.5 million to HUD in connection
with its management of such properties.
In March 1998, the City Partnerships complaint, the Kline complaint and the
Heller complaint were discontinued.
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 Angeles Mortgage
Investment Trust, 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.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Subsequent Events (continued)
In addition, the Company transferred its 19.1% limited partnership interest in
MAE to the Company's Chairman, Chief Executive Officer and President.
MAE and Insignia Contributions to IPLP
In connection with the MAE GP Merger, 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 noncontrolling 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, 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).
Winthrop Option
On February 17, 1998, Insignia granted IPLP an option (the "Winthrop Option") to
acquire all but not less than all of the Winthrop Interests at any time on or
before December 31, 1998. The Winthrop Option is exercisable by IPLP for an
aggregate cash amount of approximately $40 million at a rate equal to Insignia's
cost of funds (based on the interest rate in effect from time to time under
Insignia's revolving credit facility) and a ratable portion of the transaction
costs incurred by Insignia in connection with the acquisition. Upon exercise of
the Winthrop Option, the Operating Agreement of IPT I LLC will be amended to
make IPT the sole managing member of IPT I LLC, with the sole authority to
manage the business and affairs of IPT I LLC, and Insignia will cause the
persons designated by IPLP from time to time to be appointed as the Class B
directors of FWC.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Subsequent Events (continued)
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 purchase price 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 approximately $35 million from its
revolving credit facility, issuing 617,000 shares of its Class A Common Stock,
and assuming existing options which will enable Richard Ellis employees to
purchase 856,000 shares of the Company's Class A Common Stock.
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; the international commercial real estate services 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.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Subsequent Events (continued)
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
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 IPT, at a
price of at lease $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.
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Subsequent Events (continued)
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 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.
EXHIBIT INDEX
NUMBER EXHIBIT
3.1 Certificate of Incorporation of Insignia Financial Group, Inc., as
amended.(i)
3.2 By-Laws of Insigni a Financial Group, Inc.(i)
4.1 Certificate of Designation of Series A Preferred Stock Par Value $.01 Per
Share of Insignia Financial Group, Inc.(iii)
4.2 Certificate of Correction to Certificate of Designation of Series A
Preferred Stock Par Value $.01 Per Share of Insignia Financial Group,
Inc.(iii)
4.3 Securities Purchase Agreement dated as of May 27, 1992 by and among
Insignia Financial Group, Inc., Metropolitan Acquisition Partners V, L.P.
and IFG Limited Liability Company. Incorporated by reference to Exhibit
28.3 to Form 8-K of Registrant dated June 2, 1992.
4.4 Warrant Agreement dated as of January 17, 1995 between Insignia Financial
Group, Inc. and APTS Partners, L.P.(vi)
4.5 Certificate of Designation, Preferences and Rights of the 7.5% Step-Up Rate
Cumulative Convertible Preferred Stock of Insignia Financial Group,
Inc.(vi)
4.6 Warrant No. 32 to purchase 50,000 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to Marvin Chudnoff (vii)
4.7 Warrant issued to APTS Partners, L.P. to purchase 300,000 shares of
Insignia Financial Group, Inc. Class A Common Stock. (vii)
4.8 Warrant issued to APTS Partners, L.P. to purchase 137,500 shares of
Insignia Financial Group, Inc. Class A Common Stock. (vii)
4.9 Warrant No. 12 to purchase 46,800 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to The J & P O'Donnell Revocable Trust. (vii)
4.10 Warrant No. 13 to purchase 23,400 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to The D & S Grant Revocable Trust. (vii)
4.11 Warrant No. 14 to purchase 23,400 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to The J & C Westling Revocable Trust. (vii)
4.12 Warrant No. 15 to purchase 23,400 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to Douglas C. Neff. (vii)
4.13 Warrant No. 16 to purchase 13,000 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to John G. Combs. (vii)
4.14 Convertible Promissory Note from Insignia Financial Group, Inc. to Douglas
C. Neff in the amount of $400,000. (vii)
4.15 Convertible Promissory Note from Insignia Financial Group, Inc. to The J &
C Westling Revocable Trust in the amount of $400,000. (vii)
4.16 Convertible Promissory Note from Insignia Financial Group, Inc. to The D &
S Grant Revocable Trust in the amount of $400,000. (vii)
4.17 Convertible Promissory Note from Insignia Financial Group, Inc. to The J &
P O'Donnell Revocable Trust in the amount of $800,000. (vii)
4.18 Warrant No. 33 to purchase 63,750 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to Gotham Partners, L.P. (vii)
4.19 Warrant No. 34 to purchase 38,958 shares of Insignia Financial Group, Inc.
Class A Common Stock issued to APTS V, L.L.C. (vii)
4.20 Declaration of Trust of Insignia Financing I, dated as of October 4, 1996,
among First Union Bank of Delaware, as Delaware Trusteee, and John K. Lines
and Ronald Uretta, Trustees incorporated herein by reference to Exhibit 4.1
of Form S-3 of the Registrant filed on December 10, 1996.
4.21 Amended and Restated Declaration of Trust of Insignia Financial I, dated as
of November 1, 1996, among Insignia Financial Group, Inc., as Sponsor,
First Union National Bank of South Carolina, as Property Trustee, First
Union Bank of Delaware, as Delaware Trustee and Andrew L. Farkas, John K.
Lines and Ronald Uretta as Regular Trustees incorporated herein by
reference to Exhibit 4.2 of Form S-3 of the Registrant filed on December
10, 1996.
4.22 Indenture for the 6.5% Convertible Subordinated Debentures, dated as of
November 1, 1996, between Insignia Financial Group, Inc., as Issuer, and
First Union National Bank of South Carolina, as Trustee incorporated herein
by reference to Exhibit 4.3 of Form S-3 of the Registrant filed on December
10, 1996.
4.23 Warrant Agreement dated as of June 30, 1996 by and between Paragon Group,
L.P. and Insignia Financial Group, Inc. incorporated herein by reference to
Exhibit 4.1 of Form 8-K of Registrant filed on July 15, 1996.
4.24 Warrant No. 38 to Purchase up to 50,000 Shares of Class A Common Stock of
Insignia Financial Group, Inc. issued to Paragon Group, L.P. incorporated
herein by reference to Exhibit 4.2 of Form 8-K of Registrant filed on July
15, 1996.
10.1 Insignia 1992 Stock Incentive Plan, as amended through March 28, 1994 and
November 13, 1995. Incorporated by reference to Exhibit B to Proxy
Statement of Registrant filed on April 22, 1996.
10.2 Employment Agreement dated as of July 20, 1995 by and between Insignia
Financial Group, Inc. and Thomas R. Shuler. (vii)
10.3 Amendment No. 1 dated as of February 19, 1996 to the Employment Agreement
by and between Insignia Financial Group, Inc. and Thomas R. Shuler. (vii)
10.4 Amendment No. 1 dated as of April 1, 1995 to the Employment Agreement by
and between Insignia Financial Group, Inc. and James A. Aston. (vii)
10.5 Amendment No. 1 dated as of June 20, 1995 to the Employment Agreement by
and between Insignia Financial Group, Inc. and Andrew L. Farkas. (vii)
10.6 Amendment No. 1 dated as of April 1, 1995 to the Employment Agreement by
and between Insignia Financial Group, Inc. and Frank M. Garrison. (vii)
10.7 Amendment No. 1 dated as of April 1, 1995 to the Employment Agreement by
and between Insignia Financial Group, Inc. and Ronald Uretta. (vii)
10.8 Amendment No. 2 dated as of March 1, 1996 to the Employment Agreement by
and between Insignia Financial Group, Inc. and Andrew L. Farkas. (viii)
10.9 Amendment No. 2 dated as of February 20, 1996 to the Employment Agreement
by and between Insignia Financial Group, Inc. and James A. Aston. (viii)
10.10Amendment No. 2 dated as of February 20, 1996 to the Employment Agreement
by and between Insignia Financial Group, Inc. and Frank M. Garrison. (viii)
10.11Amendment No. 2 dated as of February 20, 1996 to the Employment Agreement
by and between Insignia Financial Group, Inc. and Ronald Uretta. (viii)
10.12Purchase Agreement dated as of December 31, 1996 between GSSW-REO Ownership
Corporation, GSSW Limited Partnership and Southwest Associates, L.P. with
respect to all of the General Partnership and Limited Partnership Interests
of Certain Limited Partnerships. (viii)
10.13Agreement of Limited Partnership of Southwest Associates, L.P. dated as of
the 31st day of December 1996. (viii)
10.14Registration Rights Agreement, dated November 1, 1996, among Insignia
Financing I, and Insignia Financial Group, Inc. and Lehman Brothers, Inc.,
Dillon, Read & Co., Inc. Goldman, Sachs & Co., and A.G. Edwards & Sons,
Inc., as Initial Purchasers incorporated herein by reference to Exhibit
10.1 to Form S-3 of Registrant filed on December 10, 1996.
10.15Asset and Stock Purchase Agreement dated as of June 17, 1996 among Insignia
Financial Group, Inc., Insignia Buyer Corporation, Edward S. Gordon Company
Incorporated, Edward S. Gordon Company of New Jersey, Inc. and Edward S.
Gordon incorporated herein by reference to Exhibit 2.1 of Form 8-K of
Registrant dated July 1, 1996.
10.16Employment Agreement dated as of June 17, 1996 by and among Insignia
Financial Group, Inc., Insignia Buyer Corporation and Edward S. Gordon
incorporated herein by reference to Exhibit 10.2 of Form 8-K of Registrant
dated July 1, 1996.
10.17Employment Agreement dated as of June 17, 1996 by and among Insignia
Financial Group, Inc., Insignia Buyer Corporation and Anthony M. Saytanides
incorporated herein by reference to Exhibit 10.3 of Form 8-K of Registrant
dated July 1, 1996.
10.18Employment Agreement dated as of June 17, 1996 by and among Insignia
Financial Group, Inc., Insignia Buyer Corporation and Stephen B. Siegel
incorporated herein by reference to Exhibit 10.4 of Form 8-K of Registrant
dated July 1, 1996.
10.19Agreement dated as of May 31, 1996 among Paragon Group, L.P., Texas Paragon
Management Partners, L.P., Paragon Group Property Services, Inc. and
Insignia Commercial Group, Inc. incorporated herein by reference to Exhibit
10.1 of Form 8-K of Registrant dated July 1, 1996.
10.20Amended and Restated Employment Agreement, dated January 1, 1997, by and
among Insignia Financial Group, Inc., Insignia Commercial Group, Inc.,
Insignia/Edward S. Gordon Co., Inc. and Stephen B. Siegel.
10.21Amendment No. 1 to Amended and Restated Employment Agreement, dated
December 18, 1997, by and among Insignia Financial Group, Inc., Insignia
Commercial Group, Inc., Insignia/Edward S. Gordon Co., Inc. and Stephen B.
Siegel.
10.22Stock Purchase Agreement, dated March 19, 1997, by and among Insignia
Commercial Group, Inc., Insignia Financial Group, Inc., Kirkland B. Armour,
Scott J. Brandwein, Harvey B. Camins, James L. Deiter, Lyan Homewood
Fender, Ronald T. Frain, Jay Hinshaw, Thomas E. Moxley, Robert B. Rosen,
James H. Swartchild, Jr., David Tropp, Gregg F. Witt, Frain, Camins &
Swartchild Incorporated, FC&S Management Company and Construction
Interiors, Incorporated, incorporated herein by reference to Exhibit 10.1
to Form 8-K of Registrant filed April 17, 1997.
10.23Amended and Restated Credit Agreement dated March 19, 1997, by and among
Insignia Financial Group, Inc., as Borrower, the Lenders referred to
therein, First Union National Bank of South Carolina, as Administrative
Agent, and Lehman Commercial Paper, Inc., as Syndication Agent,
incorporated herein by reference to Exhibit 10.1 to Form 8-K of Registrant
dated March 19, 1997.
10.24Amendment No. 1 to Employment Agreement, made April 1, 1997, by and among
Insignia Financial Group, Inc., Insignia/Edward S. Gordon Co., Inc. and
Edward S. Gordon.
10.25Amended and Restated Employment Agreement, made as of May 1, 1997, by and
among Insignia Financial Group, Inc., Insignia Commercial Group, Inc.,
Insignia/Edward S. Gordon Co., Inc. and Henry Horowitz.
10.26Amendment dated April 30, 1997, to the 1992 Stock Incentive Plan, as
amended.
10.27Stock Purchase Agreement, dated as of September 18, 1997, by and among
Insignia Financial Group, Inc., Insignia RO, Inc., Joseph T. Aveni, Vincent
T. Aveni, James C. Miller, Richard A. Golbach, Joseph T. Aveni as Trustee
of the Joseph T. Aveni Declaration of Trust dated April 25, 1988, as
amended on August 10, 1995, Vincent T. Aveni as Trustee of the Vincent T.
Aveni Declaration of Trust dated February 11, 1988, as restated on
September 14, 1995, Joseph T. Aveni as Trustee of the Vincent T. Aveni
Dynasty Trust, dated July 13, 1994, and Vincent T. Aveni as Trustee of the
Joseph T. Aveni Dynasty Trust, dated July 13, 1994, incorporated herein by
reference to Exhibit 10.1 to Form 8-K of Regsitrant filed October 21, 1997.
10.28Shareholders' Agreement dated as of October 7, 1997, by and among Insignia
Financial Group, Inc., and Joseph T. Aveni, Joseph T. Aveni as Trustee of
the Joseph T. Aveni Declaration of Trust dated April 25, 1988, as amended
on August 10, 1995, Vincent T. Aveni as Trustee of the Joseph T. Aveni
Dynasty Trust, dated July 12, 1994, Vincent T. Aveni as Trustee of the
Joseph T. Aveni Dynasty Trust dated July 12, 1994 FBO Kristen Aveni,
Vincent T. Aveni as Trustee of the Joseph T. Aveni Dynasty Trust dated July
12, 1994 FBO Kerri Aveni, Vincent T. Aveni as Trustee of the Joseph T.
Aveni Dynasty Trust dated July 12, 1994 FBO Benjamin Aveni, incorporated
herein by reference to Exhibit 10.2 to Form 8-K of Regsitrant filed October
21, 1997.
10.29Subscription and Purchase Agreement dated as of October 27, 1997, among
Insignia Financial Group, Inc., IPT I LLC, and Winthrop Financial
Associates, First Winthroup Corporation and certain additional entities,
incorporated herein by reference to Exhibit 10.1 to Form 8-K of Registrant
filed November 10, 1997.
10.30Stockholders' Agreement dated as of October 27, 1997, between Winthrop
Financial Associates and Insignia Financial Group, Inc. , incorporated
herein by reference to Exhibit 10.2 to Form 8-K of Registrant filed
November 10, 1997.
21. List of Subsidiaries. (vii)
23. Consent of Independent Auditors to Annual Report on Form 10-K for the year
ended December 31, 1997. (viii)
99. Form 11-K Re: Insignia Financial Group, Inc. 401(k) Retirement Savings Plan
for year ended December 31, 1996.
(i) Filed as an exhibit to Registration Statement on Form S-4 of Insignia
Financial Group, Inc. (then MetSouth Financial Corporation), Registration
No. 33-38094, on December 7, 1990, and incorporated herein by reference.
(iii)Filed as an Exhibit to Annual Report on Form 10-K of Insignia Financial
Group, Inc. for the year ended December 31, 1991, and incorporated herein
by reference.
(iv) Filed as an Exhibit to Registration Statement on Form S-1 of Insignia
Financial Group, Inc., Registration No. 33-67486, on October 13, 1993 and
incorporated herein by reference.
(v) Filed as an Exhibit to Annual Report on Form 10-K of Insignia Financial
Group, Inc. for the year ended December 31, 1993, and incorporated herein
by reference.
(vi) Filed as an Exhibit to Annual Report on Form 10-K of Insignia Financial
Group, Inc. for the year ended December 31, 1994, and incorporated herein
by reference.
(vii)Filed as an Exhibit to Annual Report on Form 10-K of Insignia Financial
Group, Inc. for the year ended December 31, 1995, and incorporated herein
by reference.
(viii) Filed as an Exhibit to Annual Report on Form 10-K of Insignia Financial
Group, Inc. for the year ended December 31, 1997, and incorporated herein
by reference.
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"Agreement"), made as of January 1, 1997, is by and among INSIGNIA FINANCIAL
GROUP, INC., a Delaware corporation with an office at One Insignia Financial
Plaza, Post Office Box 1089, Greenville, South Carolina 29602 (the "Parent
Company"), INSIGNIA COMMERCIAL GROUP, INC., a Delaware corporation with an
office at One Insignia Financial Plaza, Post Office Box 1089, Greenville, South
Carolina 29602, (the "Company"), INSIGNIA\Edward S. Gordon Co., Inc., a Delaware
corporation with an office at One Insignia Financial Plaza, Post Office Box
1089, Greenville, South Carolina 29602 (the "Insignia\ESG") and STEPHEN B.
SIEGEL, an individual residing at 130 East 67th Street, NY, NY 10021 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Parent Company, Insignia\ESG and the Executiv
entered into an Employment Agreement dated as of June 17, 1996 ("Employment
Agreement"); and
WHEREAS, the parties desire to amend and restate the
Employment Agreement as set forth in this Agreement; and
WHEREAS, the Company and Insignia\ESG desire to continue to
assure themselves of the services of the Executive for the period provided in
this Agreement, and the Executive continues to be willing to serve in the employ
of the Company and Insignia\ESG for such period upon the terms and conditions
hereinafter provided;
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company and Insignia\ESG hereby agrees to
employ the Executive, and the Executive hereby accepts such employment, in each
case upon the terms and conditions set forth herein, for a period commencing on
the date of this Agreement and ending on December 31, 1999 (the "Expiration
Date"), subject to earlier termination as set forth herein (such period, as it
may be so terminated, being referred to herein as the "Employment Period").
2. Duties and Services.
(a) Offices. During the Employment Period, the Executive shall
serve as President of the Company and Insignia\ESG. In the performance of his
duties hereunder, the Executive shall report to and shall be responsible only to
the Chairman, Chief Executive Officer or President of the Parent Company or the
Office of the Chairman of the Parent Company (as may be determined by the Board
of Directors of the Parent Company from time to time). The Executive agrees to
his employment as described in this Section 2, and agrees to devote
substantially all of his time and efforts to the performance of his duties
hereunder. The Executive shall be available to travel as the needs of the
business of the Company and Insignia\ESG require and as reasonably directed by
the Chairman, Chief Executive Officer or President of the Parent Company and the
Boards of Directors of the Parent Company and the Company and Insignia\ESG.
(b) Location of Office. During the Employment Period, the
Executive's office shall be located in the principal executive offices of
Insignia\ESG , which shall be in New York City, New York. Insignia\ESG will
provide the Executive with a suitable office, an executive secretary reasonably
acceptable to him, and other support appropriate to his duties hereunder.
(c) Primary Responsibilities. During the Employment Period,
the Executive shall have principal responsibility for the financial and
operational affairs of the Company and its subsidiaries including Insignia\ESG,
in each case as directed by the Chairman of the Company and the Boards of
Directors of the Parent Company and the Company and Insignia\ESG.
(d) Permitted Activities. Notwithstanding anything to the
contrary herein provided, the Executive (i) may make certain real estate and
other investments and hold positions as officers, directors and/or partners
thereof in so far as such positions and investments do not conflict with the
Executive's duties and loyalties to the Parent Company, the Company and
Insignia\ESG, and (ii) may continue to hold all positions and operate businesses
and/or receive compensation in accordance with Exhibit A annexed hereto and
incorporated herein and (iii) may hold such other positions, in charitable and
other organizations, as may be appropriate to his duties hereunder,
(collectively, the "Permitted Activities").
(e) Licensing. The Executive shall comply with the
requirements of the New York State Real Property Law (Broker's License Law) and
New York State's Rules for the Guidance of Real Estate Brokers and Salespersons
and shall maintain his real estate brokers license in effect at all times during
the Employment Period. If the Executive is not duly licensed as a real estate
broker or salesperson in New York at any time during the term of this Agreement,
the Executive will immediately notify the Chairman, the President, and the
General Counsel of the Parent Company and of the Parent Company of that fact, in
writing. During such period the Executive will not engage in any activities in
violation of the applicable licensing laws, or any other applicable law; and the
Executive will diligently take all actions necessary to obtain such license as
soon as practicable thereafter. The failure of the Executive to maintain his
real estate brokers license during the Employment Period shall constitute a
material breach of this Agreement which shall entitle the Company to terminate
the Executive's employment for cause.
(f) Membership. The Executive shall, at the Company's and
Insignia\ESG's request and expense, maintain a membership in the Real Estate
Board of New York, Inc. The Executive will at all times adhere to the Code of
Ethics and Professional Practices of said Board and to the requirements of all
applicable laws and governmental regulations.
(g) Other Duties. In addition to his duties with respect to
the Company and Insignia\ESG, the Executive shall serve on the Executive
Management Committee of the Parent Company. In such capacities, the Executive
shall report directly to the Chief Executive Officer of the Parent Company or
such other individual as may be designated by the Board of Directors of the
Parent Company. The Executive shall serve as a director and/or officer of any of
the Parent Company's subsidiaries or affiliates if the Parent Company so
requests. Executive shall not be entitled to receive any compensation for the
performance of the duties provided for in this Section 2(g) in addition to the
compensation expressly provided in this Agreement consistent with his principal
responsibilities as President of the Company and of Insignia/ESG. Executive
shall endeavor to participate in all meetings of the Executive Management
Committee. Executive shall attend, participate in, and be a representative of
the Company and Insignia\ESG at all monthly operations review meetings of the
Parent Company. It is acknowledged by Executive that recurring failure of
Executive to attend such meetings shall be a material breach of this Agreement.
3. Compensation. As full compensation for his services
hereunder, the Company shall pay, grant, issue, or give, as the case may be, to
the Executive the following:
(a) Base Salary. Subject to the provisions of Section 6, a
base salary at the rate of $1,000,000 per annum (the "Base Salary"), payable in
equal bi-weekly installments or in such other installments consistent with the
policy of the Parent Company as it may be amended from time to time.
(b) Override. Subject to the approval of the stockholders of
the Parent Company as described in Section 3(j) below, an override ("Override")
up to a maximum of $400,000 for the year ended December 31, 1997 and subsequent
years, equal to 0.6% of the gross leasing commissions received (as "received" is
defined in Section 3(d) below) by Insignia\ESG in each calendar year or part
thereof during the Employment Period, but only to the extent that the Company
and all of its wholly-owned subsidiaries on a consolidated basis (collectively
"ICG") meet or exceed the Company's annual EBITDA budget as established by the
Compensation Committee of the Parent Company's Board of Directors (the
"Compensation Committee"), after deduction of the Override payable to the
Executive, all bonus compensation paid to employees of ICG (including the
imputed bonus of the Executive as determined under this Agreement), all ICG
overhead allocations and all compensation paid to the Executive pursuant to this
Agreement, which annual EBITDA budget shall be increased by the Compensation
Committee for each subsequent year by an amount of no less than 10% of the
annual EBITDA budget for the immediately preceding year.For purposes of this
Section 3(b), EBITDA shall mean the earnings before interest, taxes,
depreciation, and amortization of ICG computed in accordance with generally
accepted accounting principles, consistently applied. In addition, for purposes
of determining the amount of the Override under this Section 3(b), the Executive
understands and agrees that the amount of gross leasing commissions received by
Insignia\ESG shall be subject to following limitation: the ratio calculated by
dividing the gross leasing commissions received by Insignia\ESG by the gross
leasing commissions received by the Company, net of the gross leasing
commissions received by Insignia\ESG, (the "Gross Commission Ratio") at the time
that the Override is determined shall be not greater than the Gross Commission
Ratio on the date of this Agreement. Accordingly, if the Gross Commission Ratio
at the time the Override is determined is greater than the Gross Commission
Ratio on the date of this Agreement, then the amount of gross leasing
commissions received by Insignia\ESG shall, for purposes of determining the
Override, be reduced to the point that the Gross Commission Ratio at the time
the Override is determined is equal to the Gross Commission Ratio on the date of
this Agreement.
(c) Advances. Insignia\ESG shall advance to the Executive an
amount equal to $50,000 less withholding permitted by Section 8 on the first day
of each month (such amounts including the related withholding are referred to as
the "Advances"). Not later than March 31 following the end of each fiscal year
(or 90 days following the termination of the Employment Period, if earlier), the
Compensation Committee shall deliver to the Executive a calculation of the
amount of Override payable to him pursuant to Section 3(b) of this Agreement and
the amount of Annual Bonus payable to him pursuant to Section 3(e) of this
Agreement for the preceding year (or portion thereof if the Employment Period
has terminated during such year). In the event the Advances for any such period
exceed the Override and Annual Bonus earned for such period, the Executive shall
repay such excess to Insignia\ESG within 15 days of receipt of such calculation.
In the event the Override and Annual Bonus earned for such period exceeds the
Advances for such period, Insignia\ESG shall pay such excess less withholding to
the Executive within 15 days of delivery of such calculation.
(d) Commissions. A commission equal to a percentage (as
determined below) of the commissions earned, received and retained
(collectively, "received") by Insignia\ESG upon transactions as to which the
Executive has rendered services recognized by Insignia\ESG. The Executive's
share of all promotional commission revenues described above shall be thirty
(30%) percent, and Insignia\ESG's share shall be seventy (70%) percent; and the
Executive's share of all net commission (e.g. arising from a transaction where
Insignia\ESG is agent for the owner of the leased premises) revenues described
above shall be fifty (50%) percent and Insignia\ESG's share shall be fifty (50%)
percent. Such compensation shall be earned by the Executive only when such
commissions have been received by Insignia\ESG and shall be payable to the
Executive at the time and in the manner that commissions are paid to other real
estate salespersons/brokers of Insignia\ESG in accordance with the then current
Insignia\ESG policy.
(e) Annual Bonus. Subject to the approval of the stockholders
of the Parent Company as described in Section 3(j) below, an annual bonus for
the year ending December 31, 1997 and subsequent years in an amount determined
by the Compensation Committee of the Parent Company, in its sole and absolute
discretion, of 10%, or such lesser percentage as such Compensation Committee
shall determine, of the increase in annual EBITDA reduced by all bonus
compensation paid to employees of ICG (including the imputed bonus of the
Executive as determined under this Agreement ), all ICG overhead allocations and
all compensation paid to the Executive pursuant to this Agreement, over the
annual EBITDA for the immediately preceding year. Such bonus shall be paid to
the Executive within one-hundred-twenty (120) days after the end of the
Company's fiscal year. For purposes of this Section 3(e), EBITDA shall mean the
earnings before interest, taxes, depreciation, and amortization of ICG computed
in accordance with generally accepted accounting principles, consistently
applied.
(f) Options and Restricted Stock. Options previously granted
on February 21, 1997 pursuant to the Parent Company's 1992 Stock Incentive Plan,
as amended, to purchase twenty five thousand (25,000) shares of the Class A
Common Stock, par value $0.01 per share, of the Parent Company (the "Parent
Company Stock") at a price equal to $21.375 per share which shall vest in five
equal installments commencing on the date six months after the date of this
Agreement and each of the next four anniversaries of such date. In addition,
seventeen thousand five hundred (17,500) shares of the Class A Common Stock, par
value $0.01 per share, of the Parent Company Stock in the form of Restricted
Stock granted pursuant to the Parent Company's 1992 Stock Incentive Plan, as
amended, which shall vest in five equal installments commencing on the date six
months after the date of this Agreement and each of the next four anniversaries
of such date.
(g) Fringe Benefit Programs. In addition to the other benefits
provided to the Executive hereunder, the right to participate in the fringe
benefit programs now or hereafter maintained by Insignia\ESG or the Parent
Company during the Employment Period and offered by Insignia\ESG or the Parent
Company to its managing directors. Such fringe benefit program may include, but
not be limited to, pension, profit sharing, stock purchase, stock option,
savings, bonus, disability, life insurance, health insurance, hospitalization,
dental, and other plans and policies authorized on the date hereof
(collectively, "Company Benefit Plans").
(h) Expense Reimbursement. Reimbursement of the Executive for
all reasonable out-of-pocket expenses incurred by him in connection with the
performance of duties hereunder, including professional activities and
membership fees and dues relating to professional organizations of which the
Executive currently is a member or is directed to be a member by the Chairman or
Chief Executive Officer of the Parent Company, upon the presentation of
appropriate documentation therefor in accordance with the then regular policies
and procedures of the Company. The Executive's current professional activities
and memberships are set forth on Exhibit B, attached hereto and made a part
hereof. The Executive shall not engage in or apply for any other professional
activity or membership without the prior written consent of the Chairman, Chief
Executive Officer or President of the Parent Company.
(i) Vacations. Paid vacation consisting of twenty (20) days
during each calendar year during the Employment Period, to be taken at such time
as is consistent with the needs of the Company and Insignia\ESG, as reasonably
determined by the Executive.
(j) Approval of Stockholders. Executive understands that the
compensation provided for in Sections 3(b) and 3(e) of this Agreement are
subject to the approval of the stockholders of the Parent Company at a meeting
of the stockholders of the Parent Company. In the event such approval is not
obtained on or before December 31, 1997, the provisions of Sections 3(b) and
3(e) shall be void ab initio, but the other provisions of this Agreement that
remain in full force and effect provided this Agreement has not been earlier
terminated in accordance with its terms.
4. Representations and Warranties of the Executive.
The Executive represents and warrants to the Parent Company,
Insignia\ESG and the Company as follows:
(a) He is acquiring the securities represented by the Options
and the Restricted Stock and, upon exercise of the Options, will acquire the
underlying Parent Company Stock, for his own account, for investment purposes
only, and not with a view toward the sale or other distribution thereof;
(b) Other than the Permitted Activities, he is under no
contractual or other restriction or obligation which is inconsistent with the
execution of this Agreement, the performance of his duties hereunder, or the
other rights of the Parent Company, Insignia\ESG or the Company hereunder; and
(c) To the best of his knowledge, he is under no physical or
mental disability that would hinder his performance of his duties under this
Agreement.
5. Non-Competition; Confidentiality.
(a) Non-Competition. In view of the unique and valuable
services it is expected the Executive will render to the Company, Insignia\ESG
and the Parent Company, the Executive's knowledge of the customers, trade
secrets, and other proprietary information relating to the business of the
Company and Insignia\ESG and their customers and suppliers, and similar
knowledge regarding the Parent Company it is expected the Executive will obtain,
the Executive agrees that (i) so long as he is employed by the Company and
Insignia\ESG pursuant to this Agreement or otherwise and (ii) for a period of
two (2) years after the Termination for Cause (as hereinafter defined) of such
employment or the Executive's termination of such employment during the
Employment Period, he will not compete with or be engaged in the same business
as, or "Participate In" (as hereinafter defined) any other business or
organization which, at the time of the cessation of the Employment Period,
competes with or is engaged in the Business (as defined in the Purchase
Agreement) or the same business as the Company, Insignia\ESG, or the Parent
Company, with respect to any product or service sold or activity engaged in by
the Company, Insignia\ESG, or the Parent Company in any geographical area which
at the time of such cessation such product or service is sold or activity is
engaged in by the Company, Insignia\ESG or the Parent Company; provided,
however, that the provisions of this Section 5 shall not be interpreted to
preclude the Executive, at any time and from time to time, from (i)
Participating In any other organization if approved by a majority of the
Directors of the Parent Company, or (ii) owning not more than five percent (5%)
of the outstanding capital stock of any publicly-traded person or (iii) as set
forth on Exhibit A. In the event of a Termination Without Cause (as hereinafter
defined) of Executive's employment the Executive shall, at his election, either
(i) observe the non-competition agreement set forth in the first sentence of
this Section 5(a) for the remainder of the Employment Period and continue to
receive the compensation provided for herein, or (ii) accept other employment
(the "Competing Employment") in the real estate industry which violates the
non-competition agreement set forth in the first sentence of this Section 5(a)
and receive compensation at the annual rate of $1,000,000 less the aggregate
amount of compensation payable to him from the Competing Employment for the
remainder of the Employment Period. In the event this Agreement is not extended
beyond the Employment Period, the Executive shall not be bound by the
non-competition agreement set forth in the first sentence of this Section 5(a).
The terms "Participate In" and "Participating In" shall mean: "directly or
indirectly, for his own benefit or for, with, or through any other person, own
or owning, manage or managing, operate or operating, control or controlling,
loan money to or lending money to, or participate in or participating in, as the
case may be, the ownership, management, operation, or control of, or be
connected or being connected, as the case may be, as a director, officer,
employee, partner, consultant, agent, independent contractor, or otherwise with,
or acquiesce or acquiescing, as the case may be, in the use of his name in."
Notwithstanding the termination or failure to extend the term of this Agreement
for any reason, the Executive will not directly or indirectly employ any person
who, at any time up to such cessation of Executive's employment, was an employee
of the Company, Insignia\ESG, or the Parent Company, within a period of two
years after such person leaves the employ of the Company, Insignia\ESG, or the
Parent Company or any of its affiliates other than his personal secretary. In
addition, notwithstanding the termination or failure to extend the term of this
Agreement for any reason, the Executive agrees that following the Employment
Period, he will not solicit anyone for the purpose of providing management,
leasing or related real estate services with respect to the properties then
managed and the clients then served by the Company, Insignia\ESG, or the Parent
Company.
(b) Confidentiality. All confidential information which the
Executive may now possess, may obtain during or after the Employment Period, or
may create prior to the end of the Employment Period or otherwise relating to
the business of the Company, Insignia\ESG or the Parent Company or any of their
subsidiaries or affiliates or of any customer or supplier of any of them shall
not be published, disclosed, or made accessible by him to any other person,
either during or after the termination of his employment, or used by him except
during the Employment Period in the business and for the benefit of the Company,
Insignia\ESG, the Parent Company and their subsidiaries and affiliates. In the
event that the Executive becomes legally compelled to disclose any of the
confidential information, the Executive will provide the Parent Company,
Insignia\ESG and the Company with prompt notice so that the Parent Company,
Insignia\ESG and the Company may seek a protective order or other appropriate
remedy and/or waive compliance with the provisions of this Section 5(b) and in
the event that such protective order or other remedy is not obtained, or should
the Parent Company, Insignia\ESG and the Company waive compliance with the
provisions of this Section 5(b), the Executive will furnish only that portion of
the confidential information which is so legally required. The Executive shall
return all tangible evidence of such confidential information to the Company,
Insignia\ESG and the Parent Company prior to or at the termination of his
employment hereunder.
(c) Non-Competition Compensation. In consideration of
Executive's performance of the agreements set forth in Sections 5(a)(ii) above,
Executive acknowledges that he was paid $300,000 in advance upon the
commencement of the Employment Period, to be allocated to the non-competition
agreement in Section 5(a)(ii). Such $300,000 is acknowledged by Executive to be
full and adequate compensation for the restrictions on the conduct of the
Executive to which he has voluntarily consented in Section 5(a)(ii).
(d) Interpretation. Since a breach of the provisions of this
Section 5 could not adequately be compensated by money damages, the Company,
Insignia\ESG or the Parent Company shall be entitled, in addition to any other
right and remedy available to it, to seek an injunction restraining such breach
and the Parent Company, Insignia\ESG and the Company shall not be required to
post a bond in any proceeding brought for such purpose. The Executive agrees
that the provisions of this Section 5 are necessary and reasonable to protect
the Company, Insignia\ESG and the Parent Company in the conduct of their
respective businesses. If any restriction contained in this Section 5 shall be
deemed to be invalid, illegal, or unenforceable by reason of the extent,
duration, or geographical scope thereof, or otherwise, then the court making
such determination shall have the right to reduce such extent, duration,
geographical scope, or other provisions hereof, and in its reduced form such
restriction shall then be enforceable in the manner contemplated hereby. Nothing
herein shall be construed as prohibiting the Company, Insignia\ESG or the Parent
Company from pursuing any other remedies, at law or in equity, for such breach
or threatened breach.
6. Termination.
(a) Definitions.
(i) Death Termination Event. As used herein,
"Death Termination Event" shall mean the death of the Executive.
(ii) Disability Termination Event. As used
herein, "Disability Termination Event" shall mean a circumstance where the
Executive is physically or mentally incapacitated or disabled or otherwise
unable to fully discharge his duties hereunder for a period of 100 consecutive
days.
(iii) Estate. As used herein, "Estate" shall mean (A)
in the event that the last will and testament of the Executive has not been
probated at the time of determination, the estate of the Executive, and (B)
in the event that the last will and testament of the Executive has been
probated at the time of determination, the legatees or the Executor who are
entitled under such will to the assets or payments at issue.
(iv) Termination For Cause. As used herein, the
term "Termination For Cause" shall mean the termination by the Company and
Insignia\ESG of the Executive's employment hereunder upon a good faith
determination by a majority vote of the members of the Board of Directors of the
Parent Company that termination of this Agreement is necessary by reason of (A)
the conviction of the Executive of a felony under state or federal law, unless
in any such case the Executive performed such act in good faith and in a manner
the Executive reasonably believed to be in or not opposed to the best interests
of the Company, Insignia\ESG or the Parent Company, (B) the continued material
breach by the Executive of any of the material provisions of this Agreement for
a period of thirty days after written notice of such breach is given to the
Executive by the Company, Insignia\ESG or the Parent Company, (C) failure by the
Executive to comply with any material directive of the Board of Directors of the
Company, Insignia\ESG or the Parent Company which shall continue for ten days
after written notice thereof is given to the Executive, (D) a violation of the
confidentiality provisions of Sections 5 or 9 of this Agreement by the
Executive, (E) the taking by the Executive of any action on behalf of the
Company, Insignia\ESG or the Parent Company knowingly without the possession by
the Executive of the appropriate authority to take such action, provided that
Executive shall have five (5) days after written notice thereof from the General
Counsel of the Parent Company to cure such breach, (F) the taking by the
Executive of actions (other than Permitted Activities) in conflict of interest
with the Company, Insignia\ESG, or the Parent Company or their subsidiaries or
affiliates, given the Executive's positions with the Company, Insignia\ESG, or
the Parent Company and their subsidiaries and affiliates, provided that
Executive shall have five (5) days after written notice thereof from the General
Counsel of the Parent Company to cure such breach, (G) the usurpation of a
corporate opportunity of the Company, Insignia\ESG, or the Parent Company or
their subsidiaries or affiliates by the Executive; provided, however, the
parties acknowledge and agree that no Permitted Activity shall constitute a
corporate opportunity, and further provided that the Executive shall have five
(5) days after written notice thereof to cure such breach, (H) the recurring
failure to attend and participate in (x) Executive Management Committee
Meetings, and (y) Monthly Operations Review Meetings, provided that the
Executive shall have five (5) days after written notice thereof from the General
Counsel of the Parent Company to cure such breach, (I) a failure as provided in
the last sentence of Section 2(e), provided that the Executive shall have five
(5) days after written notice thereof to cure such breach, or (J) a material
breach or default of any of the representations, warranties, covenants or
agreements contained in the Purchase Agreement which continues for a period of
not less than five days after Executive has received notice thereof, which (i)
shall have been asserted within twenty-four (24) months after the Closing and
(ii) results in aggregate losses, liabilities, costs, and/or damages in excess
of Four Hundred Thousand ($400,000) Dollars. Notwithstanding the foregoing, if
any breach by the Executive as described in subparts (E), (F), (H) and (I) above
is not capable of being cured within the five (5) day period following written
notice thereof from the General Counsel of the Parent Company, such breach shall
not be deemed to constitute a basis for Termination For Cause of the Executive's
employment hereunder if the Executive has taken all actions reasonably necessary
during such five (5) day period to commence the cure of such breach and has
diligently pursued such cure to completion within thirty (30) days following
such written notice to the satisfaction of the General Counsel of the Parent
Company.
(v) Termination Without Cause. As used herein,
"Termination Without Cause" shall mean any termination of the Executive's
employment hereunder by the Company, Insignia\ESG or the Parent Company that
is not a Termination For Cause, a Death Termination Event, or a Disability
Termination Event.
(b) Death Termination Event. Upon the occurrence of a Death
Termination Event, this Agreement shall terminate automatically upon the date
that such Death Termination Event occurred (subject to the last sentence of this
Section 6), whereupon Insignia\ESG shall pay to the Estate compensation at the
annual rate of One Million ($1,000,000) Dollars for a period equal to the
remaining term of the Employment Period (determined upon the assumption that the
Employment Period will not be terminated prior to the Expiration Date), but in
no event longer than one (1) year.
(c) Disability Termination Event. Upon the occurrence of a
Disability Termination Event, this Agreement shall terminate automatically upon
the date that such Disability Termination Event occurred (subject to the last
sentence of this Section 6).
(d) Termination For Cause. The Executive and the Company and
the Parent Company agree that the Company, Insignia\ESG and the Parent Company
shall have the right to effectuate a Termination For Cause prior to the
Expiration Date. Upon the occurrence of a Termination For Cause, this Agreement
shall terminate upon the date that such Termination For Cause occurs (subject to
the last sentence of this Section 6), whereupon the Executive shall be entitled
to receive the Base Salary, as then in effect, to and including the date that
such Termination For Cause occurs.
(e) Termination Without Cause. Upon the occurrence of a
Termination Without Cause, this Agreement shall terminate upon the date that
such Termination Without Cause occurs (subject to the last sentence of this
Section 6), whereupon the Executive shall make the election provided for in the
second sentence of Section 5(a) and shall be compensated in accordance with such
election.
Notwithstanding anything in this Agreement to the contrary,
Sections 3 (as to compensation, overrides, commissions, bonuses, fringe benefits
and expense reimbursements to which Executive became entitled prior to or as a
result of the termination of this Agreement), 4, 5, 6, 7, 8, 9, 10, 11, 12, 13,
14, 15, 16 and 17 of this Agreement shall survive any termination of this
Agreement or of the Executive's employment hereunder until the expiration of the
statute of limitations applicable hereto.
7. Indemnification. The Company, Insignia\ESG and the Parent
Company hereby agree, jointly and severally, to indemnify the Executive (and his
successors, legatees, estate, administrators, executors, and legal
representatives) and to advance monies to such persons to pay expenses relating
to indemnifiable events to the fullest extent permitted by the laws of the State
of Delaware, and the Executive shall be entitled to the protection of any
insurance policies the Company, Insignia\ESG or the Parent Company may elect to
maintain generally for the benefit of their directors and officers, against all
costs, charges, and expenses whatsoever incurred or sustained by him or his
successors, legatees, estate, administrators, executors, and legal
representatives in connection with any action, suit, or proceeding to which any
of such persons may be a party by reason of the Executive being or having been a
director or officer of the Company, Insignia\ESG, or the Parent Company or any
of their subsidiaries or affiliates.
8. Tax Withholding. The Company, Insignia\ESG and the Parent
Company shall be entitled to withhold from amounts payable to the Executive
hereunder such amounts as may be required by applicable tax law to be so
withheld.
9. Survival. Subject to the provisions of the last sentence of
Section 1 of this Agreement, the covenants, agreements, representations, and
warranties contained in or made pursuant to this Agreement shall survive the
termination of this Agreement, irrespective of any investigation made by or on
behalf of any party hereto. All confidential information which the Executive may
now possess, may obtain during or after the Employment Period, or may create
prior to the end of the Employment Period or otherwise relating to the business
of the Company, Insignia\ESG, or the Parent Company or any of their subsidiaries
or affiliates or of any customer or supplier of any of them shall not be
published, disclosed, or made accessible by him to any other person, either
during or after the termination of his employment, or used by him except during
the Employment Period in the business and for the benefit of the Company,
Insignia\ESG, and the Parent Company and their subsidiaries and affiliates. The
Executive shall return all tangible evidence of such confidential information to
the Company, Insignia\ESG and the Parent Company prior to or at the termination
of his employment hereunder.
10. Modification. This Agreement sets forth the entire
understanding of the parties hereto with respect to the subject matter hereof,
supersedes all existing agreements between them concerning such subject matter,
and may be modified or terminated only by a written instrument duly executed by
each party. Executive acknowledges and agrees that neither the Company,
Insignia\ESG, the Parent Company nor its subsidiaries or affiliates has or will
assume or become obligated under any existing employment agreements or
arrangements between the Executive and any of Edward S. Gordon Company
Incorporated, Edward S. Gordon Company of New Jersey, Inc., or the Affiliated
Entities (as defined in the Purchase Agreement dated June 17, 1996 among the
Parent Company, the Company, Edward S. Gordon, Edward S. Gordon Company
Incorporated and Edward S. Gordon Company, of New Jersey, Inc. ("Purchase
Agreement").
11. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given, at the address of such party set forth in the
preamble to this Agreement (or to such other address as such party shall have
furnished in writing in accordance with the provisions of this Section 11.)
Notice to the Estate shall be sufficient if addressed to the Executive as
provided in this Section 11. Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof,
except for a notice changing a party's address which shall be deemed given at
the time of receipt thereof.
12. Waiver. Any waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of a party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
13. Binding Effect. The Executive's rights and obligations
under this Agreement shall not be transferable by assignment or otherwise, such
rights shall not be subject to commutation, encumbrance, or the claims of the
Executive's creditors, and any attempt to do any of the foregoing shall be void.
The provisions of this Agreement shall be binding upon and inure to the benefit
of the Executive and his heirs and personal representatives, and shall be
binding upon and inure to the benefit of the Company, Insignia\ESG, the Parent
Company and their successors.
14. Third Party Beneficiaries. This Agreement does not create,
and shall not be construed as creating, any rights enforceable by any person not
a party to this Agreement.
15. Construction and Interpretation. Should any provision of
this Agreement require judicial interpretation, the parties hereto agree that
the court interpreting or construing the same shall not apply a presumption that
the terms hereof shall be more strictly construed against one party by reason of
the rule of construction that a document is to be more strictly construed
against the party that itself, or through its agent, prepared the same, and it
is expressly agreed and acknowledged that the Executive, the Company,
Insignia\ESG, the Parent Company and their respective representatives have
participated in the preparation hereof.
16. Headings. The headings in this Agreement are solely for
convenience of reference, and shall be given no effect in the construction or
interpretation of this Agreement.
17. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to the conflict of law provisions thereof.
19. Waiver of Trial by Jury. TO THE EXTENT PERMITTED BY
APPLICABLE LAW, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN OR AMONG THEM RELATING TO
THE SUBJECT MATTER OF THIS AGREEMENT AND THE RELATIONSHIPS BEING ESTABLISHED.
THE SCOPE OF THIS WAIVER IS INTENDED TO ENCOMPASS ANY AND ALL DISPUTES THAT MAY
BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT,
INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO THIS
AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS
A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
INSIGNIA FINANCIAL GROUP, INC.
By: /s/John K. Lines
Name: John K. Lines
Title: General Counsel
INSIGNIA\EDWARD S. GORDON CO., INC.
By: /s/John K. Lines
Name: John K. Lines
Title: Secretary
INSIGNIA COMMERCIAL GROUP, INC.
By: /s/John K. Lines
Name: John K. Lines
Title: Secretary
/s/Stephen B. Siegel
STEPHEN B. SIEGEL
AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT
AGREEMENT (this "Agreement"), made as of December 18, 1997 is by and among
INSIGNIA FINANCIAL GROUP, INC., a Delaware corporation with an office at One
Insignia Financial Plaza, Post Office Box 1089, Greenville, South Carolina 29602
(the "Company"), INSIGNIA COMMERCIAL GROUP, INC., a Delaware corporation with an
office at One Insignia Financial Plaza, Post Office Box 1089, Greenville, South
Carolina 29602, ("ICG"), INSIGNIA\Edward S. Gordon Co., Inc., a Delaware
corporation with an office at One Insignia Financial Plaza, Post Office Box
1089, Greenville, South Carolina 29602 ("Insignia\ESG") and STEPHEN B. SIEGEL,
an individual residing at 130 East 67th Street, NY, NY 10021 (the "Executive").
Background
The Company and certain of its affiliates and the Executive entered
into an Amended and Restated Employment Agreement dated as of January 1, 1997
(the "Original Agreement"). The Company and such affiliates and the Executive
now desire to amend the Original Agreement.
Statement of Agreement
In consideration of the foregoing, the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Defined Terms. Capitalized terms used in this Agreement
but not otherwise defined herein shall have the meanings ascribed thereto
in the Original Agreement.
Section 2. Amendment of Section 1 of the Original Agreement. Section 1 of
the Original Agreement is hereby amended by deleting "December 31, 1999" and
inserting in its place "December 31, 2002".
Section 3. The following new Sections 20, 21 and 22 are hereby added to the
Original Agreement:
Section 20. Loan. The Company shall make an unsecured loan to
the Executive in the principal amount of $1,000,000 (the
"Loan"), which Loan shall be upon the terms and conditions set
forth in, and shall be evidenced by, the Note attached as
Exhibit A hereto and hereby made a part hereof (the "Note"),
which Loan shall be made to the Executive upon the demand of
the Executive and the Executive's execution of this Agreement
and the Note and delivery of this Agreement and the Note to
the Company.
Section 21. Term Life Insurance. The Company shall purchase
term life insurance, providing a death benefit of $5,000,000,
upon the life of the Executive, the beneficiaries of which
shall be designated by the Executive and which term life
insurance shall be upon terms and conditions, and in form and
substance, available at the time, and otherwise reasonably
satisfactory to the Executive and which term life insurance
shall be maintained by the Company during the Employment
Period at the Company's sole cost and expense; provided
however the Company shall only be required to purchase such
life insurance to the extent that it is commercially
reasonably available.
Section 22. Key Man Life Insurance. The Company shall provide
"Key man" life insurance, providing a death benefit of
$15,000,00 upon the death of the Executive, for which the
Company is the beneficiary (the "Key Man Insurance Policy").
In connection therewith, the Executive hereby authorizes the
Company, at its sole cost and expense, to purchase and
maintain upon the life of the Executive such insurance policy,
and agrees to submit to such medical examinations, and to
provide and/or consent to the release of such medical
information, as may be necessary or desirable in order to
secure the issuance thereof.
Section 4. Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or delivered against receipt to the party to whom it
is to be given, at the address of such party set forth in the preamble of this
Agreement (or to such other address as such party shall have furnished in
writing in accordance with the provisions of this Section). Notice to the Estate
shall be sufficient if addressed to the Executive as provided in this Section.
Any notice or other communication given by certified mail shall be deemed given
at the time of certification thereof, except for a notice changing a party's
address which shall be deemed at the time of receipt thereof.
Section 5. Waiver. Any waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
Section 6. Binding Effect. The Executive's rights and obligations under
this Agreement shall not be transferable by assignment or otherwise, such rights
shall not be subject to commutation, encumbrance or the claims of the
Executive's creditors, and any attempt to do any of the foregoing shall be void.
The provisions of this Agreement shall be binding upon and inure to the benefit
of the Executive and his heirs and personal representatives, and shall be
binding upon and inure to the benefit of the Company and its successors.
Section 7. Thirty Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement.
Section 8. Headings. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
Section 9. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to the conflict of law provisions hereof.
Section 11. Affirmation. The parties hereto agree that the Original
Agreement and all of the terms, covenants and agreements contained therein, as
amended hereby, is in full force and effect on and as of the date hereof.
Section 12. Acknowledgment. The Executive acknowledges and agrees that the
valuable benefits created by this Agreement in favor of the Executive shall
constitute additional good and valuable consideration, above and beyond the good
and valuable consideration already provided under the Original Agreement
notwithstanding this Agreement, for the agreements, covenants, duties and other
obligations of the Executive under this Agreement and the Original Agreements.
The Executive further acknowledges and agrees that the total consideration
provided under the Agreement, as amended hereby, for his agreements, covenants,
duties and other obligations under the Original Agreement is fair and adequate.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
INSIGNIA FINANCIAL GROUP, INC.
By: /s/Andrew L. Farkas
Name: Andrew L. Farkas
Title: Chairman & COO
INSIGNIA/EDWARD S. GORDON CO., INC.
By: /s/John K. Lines
Name: John K. Lines
Title: Secretary
INSIGNIA COMMERCIAL GROUP, INC.
By: /s/Stephen B. siegel
Name: Stephen B. Siegel
Title: President
/s/Stephen B. Siegel
STEPHEN B. SIEGEL
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (this "Agreement"), made
as of April 1, 1997, is by and among Insignia Financial Group, Inc., a Delaware
corporation with an office at One Insignia Financial Plaza, Post Office Box
1089, Greenville, South Carolina 29602 (the Parent "Company"), Insignia/Edward
S. Gordon Co., Inc., a Delaware corporation with an office at Insignia Financial
Plaza, Post Office Box 1089, Greenville, South Carolina 29602 (the "Company)"
and EDWARD S. GORDON , an individual with an office c/o Edward S. Gordon
Company, Incorporated, 200 Park Avenue, New York, New York 10166 (the
"Executive").
Background
The Parent Company, the Company and the Executive entered into an
Employment Agreement dated as of June 17, 1996 ("Original Agreement"). The
Parent Company, the Company and the Executive now desire to amend the Original
Agreement.
Statement of Agreement
In consideration of the foregoing, the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Defined Terms. Capitalized terms used in this Agreement
but not otherwise defined herein shall have the meanings ascribed thereto in the
Original Agreement.
Section 2. Amendment of Section 3(b)(i) of the Original Agreement.
Section 3(b)(i) of the Original Agreement is hereby amended by deleting " be not
more than" in the second sentence of such section and inserting in its place "
be not less than".
Section 3. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given, at the address of such party set forth in the
preamble of this Agreement (or to such other address as such party shall have
furnished in writing in accordance with the provisions of this Section). Notice
to the Estate shall be sufficient if addressed to the Executive as provided in
this Section. Any notice or other communication given by certified mail shall be
deemed given at the time of certification thereof, except for a notice changing
a party's address which shall be deemed given at the time of receipt thereof.
Section 4. Waiver. Any waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of a party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
Section 5. Binding Effect. The Executive's rights and obligations under
this Agreement shall not be transferrable by assignment or otherwise, such
rights shall not be subject to commutation, encumbrance or the claims of the
Executive's creditors, and any attempt to do any of the foregoing shall be void.
The provisions of this Agreement shall be binding upon and inure to the benefit
of the Executive and his heirs and personal representatives, and shall be
binding upon and inure to the benefit of the Company and its successors.
Section 6. Third Party Beneficiaries. This Agreement does not
create, and shall not be construed as creating, any rights enforceable by any
person not a party to this Agreement.
Section 7. Headings. The headings in this Agreement are solely
for convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
Section 8. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 9. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of South Carolina,
without reference to the conflict of law provisions hereof.
Section 10. Affirmation . The parties hereto agree that the
Original Agreement, as amended hereby, is in full force and effect on and as of
the date hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
INSIGNIA FINANCIAL GROUP, INC.
By: /s/John K. Lines
Name: John K. Lines
Title: General Counsel
INSIGNIA\EDWARD S. GORDON CO., INC.
By: /s/John K. Lines
Name: John K. Lines
Title: Secretary
/s/ Edward S. Gordon
EDWARD S. GORDON
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"Agreement"), made as of May 1, 1997, is by and among INSIGNIA FINANCIAL GROUP,
INC., a Delaware corporation with an office at One Insignia Financial Plaza,
Post Office Box 1089, Greenville, South Carolina 29602 (the "Parent Company"),
INSIGNIA COMMERCIAL GROUP, INC., a Delaware corporation with an office at One
Insignia Financial Plaza, Post Office Box 1089, Greenville, South Carolina
29602, (the "Company"), INSIGNIA\Edward S. Gordon Co., Inc., a Delaware
corporation with an office at One Insignia Financial Plaza, Post Office Box
1089, Greenville, South Carolina 29602 (the "Insignia\ESG") and HENRY HOROWITZ,
an individual residing at 105 Hidden Hills Drive, Greenville, SC 29605 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Parent Company and the Executive entered into an
Employment Agreement dated as of December 14, 1992 ("Employment Agreement"); and
WHEREAS, the parties desire to amend and restate the
Employment Agreement as set forth in this Agreement; and
WHEREAS, the Company and Insignia\ESG desire to continue to
assure themselves of the services of the Executive for the period provided in
this Agreement, and the Executive continues to be willing to serve in the employ
of the Company and Insignia\ESG for such period upon the terms and conditions
hereinafter provided;
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
Section 1. Employment. The Parent Company, the Company and
Insignia\ESG hereby agrees to employ the Executive, and the Executive hereby
accepts such employment, in each case upon the terms and conditions set forth
herein, for a period commencing on the date of this Agreement and ending on
August 30, 1999 (the "Expiration Date"), subject to earlier termination as set
forth herein (such period, as it may be so terminated, being referred to herein
as the "Employment Period").
Section 2. Duties and Services.
(a) Offices. During the Employment Period, the Executive shall
serve as Chief Operating Officer of the Company and Executive Managing Director
of the Parent Company. In the performance of his duties hereunder, the Executive
shall report to and shall be responsible only to the Chairman, Chief Executive
Officer or President of the Parent Company and the President of the Company (as
may be determined by the Board of Directors of the Parent Company from time to
time). The Executive agrees to his employment as described in this Section 2,
and agrees to devote substantially all of his time and efforts to the
performance of his duties hereunder. The Executive shall be available to travel
as the needs of the business of the Parent Company, the Company and Insignia\ESG
require and as reasonably directed by the Chairman, Chief Executive Officer or
President of the Parent Company and the Boards of Directors of the Parent
Company and the Company and Insignia\ESG.
(b) Location of Office. During the Employment Period, the
Executive's office shall be located in the principal executive offices of the
Parent Company, which shall be in Greenville, South Carolina . The Executive
will be provided with a suitable office, an executive secretary reasonably
acceptable to him, and other support appropriate to his duties hereunder.
(c) Primary Responsibilities. During the Employment Period,
the Executive shall have principal responsibility for the financial and
operational affairs of the Company and its subsidiaries including Insignia\ESG
and Insignia Capital Advisors, Inc., in each case as directed by the Chairman,
Chief Executive Officer and President of the Parent Company, the President of
the Company and the Boards of Directors of the Parent Company and the Company
and Insignia\ESG.
(d) Permitted Activities. Notwithstanding anything to the
contrary herein provided, in addition to those investments set forth on Exhibit
A attached hereto, the Executive (i) may make certain real estate and other
investments and hold positions as officers, directors and/or partners thereof as
long as (A) such positions and investments do not conflict with the Executive's
duties and loyalties to the Parent Company, the Company and Insignia\ESG, (B)
are consistent with the then existing policies of the Parent Company in
connection with investments permitted to be made by senior officers of the
Parent Company, and (C) have been approved by the Parent Company, and (ii) may
hold such other positions, in charitable and other organizations, as may be
appropriate to his duties hereunder, (collectively, the "Permitted Activities").
(e) Other Duties. In addition to his duties with respect to
the Company and Insignia\ESG, the Executive shall serve on the Executive
Management Committee of the Parent Company. In such capacities, the Executive
shall report directly to the Chief Executive Officer of the Parent Company or
such other individual as may be designated by the Board of Directors of the
Parent Company. The Executive shall serve as a director and/or officer of any of
the Parent Company's subsidiaries or affiliates if the Parent Company so
requests. Executive shall not be entitled to receive any compensation for the
performance of the duties provided for in this Section 2(f) in addition to the
compensation expressly provided in this Agreement consistent with his principal
responsibilities as Chief Operating Officer of the Company and of Insignia/ESG.
Executive shall endeavor to participate in all meetings of the Executive
Management Committee. Executive shall attend, participate in, and be a
representative of the Company and Insignia\ESG at all monthly operations review
meetings of the Parent Company. It is acknowledged by Executive that recurring
failure of Executive to attend such meetings shall be a material breach of this
Agreement.
Section 3. Compensation. As full compensation for his services
hereunder, the Company shall pay, grant, issue, or give, as the case may
be, to the Executive the following:
(a) Base Salary. Subject to the provisions of Section 6, a
base salary at the rate of $300,000 per annum (the "Base Salary"), payable in
equal bi-weekly installments or in such other installments consistent with the
policy of the Parent Company as it may be amended from time to time.
(b) Annual Bonus. An annual discretionary bonus of up to a
maximum of $250,000 for the year ended December 31, 1997 and subsequent years
(as such maximum bonus amount may be adjusted from time to time in the sole and
absolute discretion of the Compensation Committee of the Board of Directors)
based upon the combined Company and Insignia/ESG (including Insignia Capital
Advisors, Inc. and the Company's other subsidiaries) targeted Net EBITDA being
achieved but in any event in the sole and absolute discretion of the
Compensation Committee of the Board of Directors of the Parent Company. Such
bonus shall be paid to the Executive within one hundred (120) days after the end
of the Parent Company's fiscal year.
(c) Additional Annual Bonus. An annual bonus for the year ending December
31, 1997 and subsequent years in an amount determined by the Compensation
Committee of the Board of Directors of the Parent Company, in its sole and
absolute discretion, of 5%, or such lesser percentage as such Compensation
Committee shall determine, of the increase in annual Net EBITDA, reduced by all
bonus compensation paid to employees of the Company and Insignia/ESG (including
Insignia Capital Advisors, Inc. and the Company's other subsidiaries) (including
the imputed bonus of the Executive as determined under this Agreement ), all
Company and Insignia/ESG overhead allocations and all compensation paid to the
Executive pursuant to this Agreement, over the annual Net EBITDA for the
immediately preceding year. Such bonus shall be paid to the Executive within
one-hundred twenty (120) days after the end of the Parent Company's fiscal year.
For purposes of this Agreement, Net EBITDA shall mean the earnings before
interest, taxes, depreciation, and amortization of the Company and Insignia/ESG
net of the debt of the Parent Company at the Parent Company's cost of such debt
plus fifteen (15%) percent of the cost of such debt to the Parent Company
computed in accordance with generally accepted accounting principles,
consistently applied.
(d) Options and Restricted Stock. Options pursuant to the
Parent Company's 1992 Stock Incentive Plan, as amended, to purchase ten thousand
(10,000) shares of the Class A Common Stock, par value $0.01 per share, of the
Parent Company (the "Parent Company Stock") at a price equal to $17.50 per share
which shall vest in five equal installments commencing on the date six months
after the date of this Agreement and each of the next four anniversaries of such
date. In addition, five thousand (5,000) shares of the Class A Common Stock, par
value $0.01 per share, of the Parent Company Stock in the form of restricted
stock granted pursuant to the Parent Company's 1992 Stock Incentive Plan, as
amended, which shall vest in five equal installments commencing on the date six
months after the date of this Agreement and each of the next four anniversaries
of such date.
(e) Fringe Benefit Programs. In addition to the other benefits
provided to the Executive hereunder, the right to participate in the fringe
benefit programs now or hereafter maintained by the Parent Company during the
Employment Period and offered by the Parent Company to its managing directors.
Such fringe benefit program may include, but not be limited to, pension, profit
sharing, stock purchase, stock option, savings, bonus, disability, life
insurance, health insurance, hospitalization, dental, and other plans and
policies authorized on the date hereof (collectively, "Company Benefit Plans").
(f) Expense Reimbursement. Reimbursement of the Executive for
all reasonable out-of-pocket expenses incurred by him in connection with the
performance of duties hereunder, including professional activities and
membership fees and dues relating to professional organizations of which the
Executive currently is a member as set forth on Exhibit B attached hereto, or is
directed to be a member by the Chairman or Chief Executive Officer of the Parent
Company, upon the presentation of appropriate documentation therefor in
accordance with the then regular policies and procedures of the Company. The
Executive shall not engage in or apply for any other professional activity or
membership without the prior written consent of the Chairman, Chief Executive
Officer or President of the Parent Company.
(g) Vacations. Paid vacation consisting of twenty (20) days
during each calendar year during the Employment Period, to be taken at such time
as is consistent with the needs of the Parent Company, the Company and
Insignia\ESG, as reasonably determined by the Executive.
(h) Perquisites. In addition to the other benefits provided to
the Executive hereunder, and at the sole cost and expense of the Company except
as otherwise provided herein:
(i) A membership at The Commerce Club, Greenville,
South Carolina;
(ii) A membership at The Greenville Country Club
in Greenville, South Carolina including all of the monthly business related
expenses incurred by the Executive; and
(iii) Reasonable consultations with financial and tax
advisors or counselors, including annual income tax preparation.
(i) Loan. An unsecured loan in the principal amount of
$150,000 (the "Loan"), which Loan shall be upon the other terms and conditions
set forth in, and shall be evidenced by, the Note attached as Exhibit A hereto
and hereby made a part hereof (the "Note"), which Loan shall be made to the
Executive upon the Executive's execution of this Agreement and the Note and
delivery of this Agreement and the Note to the Company. To the extent there is a
conflict between the terms of this Agreement and the terms of the Note, the
terms of this Agreement will supercede the terms of the Note.
Section 4. Representations and Warranties of the Executive.
The Executive represents and warrants to the Parent Company,
Insignia\ESG and the Company as follows:
(a) He is acquiring the securities represented by the Options
and the Restricted Stock and, upon exercise of the Options, will acquire the
underlying Parent Company Stock, for his own account, for investment purposes
only, and not with a view toward the sale or other distribution thereof;
(b) Other than the Permitted Activities, he is under no
contractual or other restriction or obligation which is inconsistent with the
execution of this Agreement, the performance of his duties hereunder, or the
other rights of the Parent Company, Insignia\ESG or the Company hereunder; and
(c) To the best of his knowledge, he is under no physical or
mental disability that would hinder his performance of his duties under this
Agreement.
Section 5. Non-Solicitation; Confidentiality.
(a) Non-Solicitation. In view of the unique and valuable
services it is expected the Executive will render to the Company, Insignia\ESG
and the Parent Company, the Executive's knowledge of the customers, trade
secrets, and other proprietary information relating to the business of the
Parent Company, the Company, Insignia\ESG and their affiliates and their
customers, clients and suppliers, the Executive agrees that (i) so long as he is
employed by the Parent Company, the Company and Insignia\ESG pursuant to this
Agreement or otherwise and (ii) for a period of two (2) years after a
Termination for Cause, a Termination Without Cause, or the Executive's voluntary
termination of such employment, except for those properties owned directly or
indirectly by the Executive at the cessation of the Executive's employment with
the Company, he will not either on his own behalf or as an officer, director,
employee, agent, representative, independent contractor or in any relationship
to any person, partnership, corporation or other entity (except the Parent
Company), solicit, directly or by assisting others, business from any of the
Parent Company's or any of its affiliates' customers or clients for the purpose
of providing goods or services to Parent Company's or any of its affiliates'
customers or clients which are directly competitive with goods or services
provided by the Parent Company or any of its affiliates to such customers or
clients; and (ii) while Executive is employed with the Parent Company, and for a
period of two (2) years following the date on which Executive's employment with
the Company ceases for any reason, Executive shall not, either on his own behalf
or as an officer, director, employee, agent, representative, independent
contractor or in any relationship to any person, partnership, corporation or
other entity (except the Parent Company), solicit or accept, directly or
indirectly or by assisting others, business from any of the Parent Company's or
any of its affiliates' customers or clients who have a written contract with the
Parent Company or any of its affiliates at the time Executive's employment with
the Parent Company ceases for the purpose of providing goods or services
provided by the Parent Company or any of its affiliates to such customers or
clients. Notwithstanding the termination or failure to extend the term of this
Agreement for any reason, the Executive will not for a period of two (2) years
following the cessation of the Executive's employment with the Company directly
or indirectly employ any person who, at any time up to such cessation of
Executive's employment, was an employee of the Company, Insignia\ESG or the
Parent Company, within a period of two years after such person leaves the employ
of the Company, Insignia\ESG or the Parent Company or any of its affiliates
other than his personal secretary and Michael Horowitz. In addition,
notwithstanding the termination or failure to extend the term of this Agreement
for any reason, the Executive agrees that following the cessation of Executive's
employment with the Parent Company, the Company and Insignia/ESG he will not
solicit anyone for the purpose of providing management, leasing or related real
estate services with respect to the properties then managed and the clients then
served by the Company, Insignia\ESG or the Parent Company.
(b) Confidentiality. All confidential information which the
Executive may now possess, may obtain during or after the Employment Period, or
may create prior to the end of the Employment Period or otherwise relating to
the business of the Company, Insignia\ESG or the Parent Company or any of their
subsidiaries or affiliates or of any customer or supplier of any of them shall
not be published, disclosed, or made accessible by him to any other person,
either during or after the termination of his employment, or used by him except
during the Employment Period in the business and for the benefit of the Company,
Insignia\ESG, the Parent Company and their subsidiaries and affiliates. In the
event that the Executive becomes legally compelled to disclose any of the
confidential information, the Executive will provide the Parent Company,
Insignia\ESG and the Company with prompt notice so that the Parent Company,
Insignia\ESG and the Company may seek a protective order or other appropriate
remedy and/or waive compliance with the provisions of this Section 5(b) and in
the event that such protective order or other remedy is not obtained, or should
the Parent Company, Insignia\ESG and the Company waive compliance with the
provisions of this Section 5(b), the Executive will furnish only that portion of
the confidential information which is so legally required. The Executive shall
return all tangible evidence of such confidential information to the General
Counsel of the Parent Company prior to or at the termination of his employment
hereunder.
(c) Interpretation. Since a breach of the provisions of this
Section 5 could not adequately be compensated by money damages, the Company,
Insignia\ESG or the Parent Company shall be entitled, in addition to any other
right and remedy available to it, to seek an injunction restraining such breach
and the Parent Company, Insignia\ESG and the Company shall not be required to
post a bond in any proceeding brought for such purpose. The Executive agrees
that the provisions of this Section 5 are necessary and reasonable to protect
the Company, Insignia\ESG and the Parent Company in the conduct of their
respective businesses. If any restriction contained in this Section 5 shall be
deemed to be invalid, illegal, or unenforceable by reason of the extent,
duration, or geographical scope thereof, or otherwise, then the court making
such determination shall have the right to reduce such extent, duration,
geographical scope, or other provisions hereof, and in its reduced form such
restriction shall then be enforceable in the manner contemplated hereby. Nothing
herein shall be construed as prohibiting the Company, Insignia\ESG or the Parent
Company from pursuing any other remedies, at law or in equity, for such breach
or threatened breach.
Section 6. Termination.
(a) Definitions.
(i) Death Termination Event. As used herein,
"Death Termination Event" shall mean the death of the Executive.
(ii) Disability Termination Event. As used
herein, "Disability Termination Event" shall mean a circumstance where the
Executive is physically or mentally incapacitated or disabled or otherwise
unable to fully discharge his duties hereunder for a period of 100 consecutive
days.
(iii) Estate. As used herein, "Estate" shall mean (A)
in the event that the last
will and testament of the Executive has not been probated at the time of
determination, the estate of the Executive, and (B) in the event that the last
will and testament of the Executive has been probated at the time of
determination, the legatees or the Executor who are entitled under such will to
the assets or payments at issue.
(iv) Termination For Cause. As used herein, the
term "Termination For Cause" shall
mean the termination by the Parent Company, the Company and Insignia\ESG of the
Executive's employment hereunder upon a good faith determination by a majority
vote of the members of the Board of Directors of the Parent Company that
termination of this Agreement is necessary by reason of (A) the conviction of
the Executive of a felony under state or federal law, unless in any such case
the Executive performed such act in good faith and in a manner the Executive
reasonably believed to be in or not opposed to the best interests of the
Company, Insignia\ESG or the Parent Company, (B) the continued breach by the
Executive of any of the provisions of this Agreement for a period of thirty days
after written notice of such breach is given to the Executive by the Company,
Insignia/ESG or the Parent Company, (C) the failure by the Executive to comply
with any directive of the Board of Directors of the Company, Insignia\ESG or the
Parent Company which shall continue for ten days after written notice thereof is
given to the Executive, (D) a violation of the confidentiality provisions of
Section 5 of this Agreement by the Executive, (E) the taking by the Executive of
any action on behalf of the Company, Insignia\ESG or the Parent Company
knowingly without the possession by the Executive of the appropriate authority
to take such action, provided that Executive shall have five (5) days after
written notice thereof from the General Counsel of the Parent Company to cure
such breach, (F) the taking by the Executive of actions (other than Permitted
Activities) in conflict of interest with the Company, Insignia\ESG, or the
Parent Company or their subsidiaries or affiliates, given the Executive's
positions with the Company, Insignia\ESG, or the Parent Company and their
subsidiaries and affiliates, provided that the Executive shall have five (5)
days after written notice thereof from the General Counsel of the parent Company
to cure such breach, (G) except to the extent approved in writing by the Board
of Directors of the Parent Company, the usurpation of a corporate opportunity of
the Company, Insignia\ESG, or the Parent Company or their subsidiaries or
affiliates by the Executive; provided, however, the parties acknowledge and
agree that no Permitted Activity shall constitute a corporate opportunity, and
further provided that the Executive shall have five (5) days after written
notice thereof to cure such breach, (H) the recurring failure to attend and
participate in (x) Executive Management Committee Meetings, and (y) Monthly
Operations Review Meetings, provided that the Executive shall have five (5) days
after written notice thereof from the General Counsel of the Parent Company to
cure such breach, (I) a failure as provided in the last sentence of Section
2(e), provided that the Executive shall have five (5) days after written notice
thereof to cure such breach, or (J) the violation of any of the policies of the
Parent Company, the Company or Insignia/ESG.
(v) Termination Without Cause. As used herein, "Termination Without Cause"
shall mean any termination of the Executive's employment hereunder by the
Company, Insignia\ESG or the Parent Company that is not a Termination For Cause,
a Death Termination Event, a Disability Termination Event, or a voluntary
resignation by Executive. (b) Death Termination Event. Upon the occurrence of a
Death Termination Event, this Agreement shall terminate automatically upon the
date that such Death Termination Event occurred (subject to the last sentence of
this Section 6), whereupon the Company shall pay to the Estate compensation at
the annual rate equal to the Base Salary then in effectfor a period equal to the
remaining term of the Employment Period (determined upon the assumption that the
Employment Period will not be terminated prior to the Expiration Date), but in
no event longer than one (1) year and shall forgive any amount remaining due on
the Loan.
(c) Disability Termination Event. Upon the occurrence of a
Disability Termination Event, this Agreement shall terminate automatically upon
the date that such Disability Termination Event occurred (subject to the last
sentence of this Section 6), whereupon. the Company shall pay to the Executive
compensation at the annual rate equal to the Base Salary then in effect for a
period equal to the remaining term of the Employment Period (determined upon the
assumption that the Employment Period will not be terminated prior to the
Expiration Date), but in no event longer than one (1) year and shall forgive any
amount remaining due on the Loan.
(d) Termination For Cause. The Executive and the Company,
Insignia/ESG and the Parent Company agree that the Company, Insignia\ESG and the
Parent Company shall have the right to effectuate a Termination For Cause prior
to the Expiration Date. Upon the occurrence of a Termination For Cause, this
Agreement shall terminate upon the date that such Termination For Cause occurs
(subject to the last sentence of this Section 6), whereupon the Executive shall
be entitled to receive the Base Salary, as then in effect, to and including the
date that such Termination For Cause occurs.
(e) Termination Without Cause. Upon the occurrence of a
Termination Without Cause, this Agreement shall terminate upon the date that
such Termination Without Cause occurs (subject to the last sentence of this
Section 6), whereupon the Company shall pay to the Executive compensation at the
annual rate equal to the Base Salary then in effect and all bonus compensation
for a period equal to the remaining term of the Employment Period (determined
upon the assumption that the Employment Period will not be terminated prior to
the Expiration Date), but in no event longer than one (1) year and shall forgive
any amount remaining due on the Loan.
Notwithstanding anything in this Agreement to the contrary,
Sections 3 (as to compensation, overrides, commissions, bonuses, fringe benefits
and expense reimbursements to which Executive became entitled prior to or as a
result of the termination of this Agreement), 4, 5, 6, 7, 8, 9, 10, 11, 12, 13,
14, 15, 16, and 17 of this Agreement shall survive any termination of this
Agreement or of the Executive's employment hereunder until the expiration of the
statute of limitations applicable hereto.
Section 7. Indemnification. Parent Company and the Executive have entered
into an Indemnification Agreement dated as of May 25, 1995.
Section 8. Tax Withholding. The Company, Insignia\ESG and the Parent
Company shall be entitled to withhold from amounts payable to the Executive
hereunder such amounts as may be required by applicable tax law to be so
withheld.
Section 9. Survival. Subject to the provisions of the last sentence of
Section 1 of this Agreement, the covenants, agreements, representations, and
warranties contained in or made pursuant to this Agreement shall survive the
termination of this Agreement, irrespective of any investigation made by or on
behalf of any party hereto.
Section 10. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given, at the address of such party set forth in the
preamble to this Agreement (or to such other address as such party shall have
furnished in writing in accordance with the provisions of this Section 10.)
Notice to the Estate shall be sufficient if addressed to the Executive as
provided in this Section 10. Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof,
except for a notice changing a party's address which shall be deemed given at
the time of receipt thereof.
Section 11. Waiver. Any waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
Section 12. Binding Effect. The Executive's rights and obligations under
this Agreement shall not be transferable by assignment or otherwise, such rights
shall not be subject to commutation, encumbrance, or the claims of the
Executive's creditors, and any attempt to do any of the foregoing shall be void.
The provisions of this Agreement shall be binding upon and inure to the benefit
of the Executive and his heirs and personal representatives, and shall be
binding upon and inure to the benefit of the Company, Insignia\ESG, the Parent
Company and their successors.
Section 13. Third Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement.
Section 14. Construction and Interpretation. Should any
provision of this Agreement require judicial interpretation, the parties hereto
agree that the court interpreting or construing the same shall not apply a
presumption that the terms hereof shall be more strictly construed against one
party by reason of the rule of construction that a document is to be more
strictly construed against the party that itself, or through its agent, prepared
the same, and it is expressly agreed and acknowledged that the Executive, the
Company, Insignia\ESG, the Parent Company and their respective representatives
have participated in the preparation hereof.
Section 15. Headings. The headings in this Agreement are solely for
convenience of reference, and shall be given no effect in the construction or
interpretation of this Agreement.
Section 16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of South Carolina, without
reference to the conflict of law provisions thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
INSIGNIA FINANCIAL GROUP, INC.
By: /S/John K. Lines
Name: John K. Lines
Title: General Counsel
INSIGNIA\EDWARD S. GORDON CO., INC.
By: /s/John K. Lines
Name: John K. Lines
Title: Secretary
INSIGNIA COMMERCIAL GROUP, INC.
By: /s/John K. Lines
Name: John K. Lines
Title: Secretary
/s/Henry Horowitz
HENRY HOROWITZ
SUPPLEMENTAL INFORMATION
MEMORANDUM
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING
SECURITIES REGISTERED UNDER THE SECURITIES ACT OF 1933.
TO: The holders of restricted stock awards and stock options (the "Awards")
to acquire an aggregate of up to 5,250,000 shares of the Class A
Common Stock of Insignia Financial Group, Inc. granted pursuant to
the Insignia 1992 Stock Incentive Plan, as amended and restated (the
"Plan")
DATE: April 30, 1997
RE: The Awards
- ------------------------------------------------------------------------------
The following information should be considered together with
the form of Award, including the Plan, annexed hereto:
1. In 1992, the Company established the Plan in which key
employees (including officers) of, directors of, and consultants and advisors
to, the Company and its subsidiaries may participate. This group includes
approximately 400 employees. The Plan was amended effective March 28, 1994,
November 13, 1995 and March 25, 1997. The purpose of the Plan is to enable key
employees of the Company to acquire a proprietary interest in the Company
through the ownership of Class A Common Stock of the Company. The Plan is
administered by the Compensation Committee of the Board of Directors of the
Company. The Compensation Committee determines, subject to the provisions of the
Plan and such limitations as the Board of Directors may from time to time
impose, the persons to whom, and the time or times at which, grants of Awards
shall be made, the number of shares of Common Stock subject to an Award, and
other terms and provisions of the Awards. In determining the persons who are to
receive Awards, the Compensation Committee considers the person's position,
responsibilities, service, and accomplishments, as well as the individual's
present and future value to the company, the anticipated length of his future
service, and other relevant factors.
2. Awards granted under the Plan may be incentive stock
options, non-qualified stock options or restricted stock awards. The total
number of shares of Class A Common Stock of the Company which may be issued
pursuant to the Plan is 5,250,000 (subject to adjustment in certain
circumstances).
3. The Company is not obligated to sell or issue shares of
Class A Common Stock in any manner in contravention of the Securities Act of
1933 (the "Securities Act") or any state securities law. All shares of Class A
Common Stock acquired pursuant to Awards may only be reoffered or resold
pursuant to a registration statement prepared for that purpose, pursuant to an
exemption from the registration requirements of the Securities Act, or pursuant
to the requirements of Rule 144 (except the holding period requirement set forth
in paragraph (d) of such Rule) promulgated under the Securities Act.
4. The principal Federal income tax consequences with
respect to the Awards are summarized below.
Incentive Stock Options. In general, an optionee will not
realize taxable income upon either the grant or the exercise of an incentive
stock option ("ISO") and the Company will not realize an income tax deduction at
either such time. If the optionee does not sell the Class A Common Stock
received pursuant to the exercise of the ISO within either (i) two years after
the date of the grant of the ISO or (ii) one year after the date of exercise, a
subsequent sale of the Class A Common stock will result in long-term capital
gain or loss to the optionee and will not result in a tax deduction to the
Company.
If the optionee disposes of the Class A Common Stock acquired
upon exercise of the ISO within either of the above mentioned time periods, the
optionee will generally realize as ordinary income an amount equal to the lesser
of (I) the fair market value of the Class A Common Stock on the date of exercise
over the option price, or (ii) the amount realized upon disposition over the
option price. In such event, the Company generally will be entitled to an income
tax deduction equal to the amount recognized as ordinary income would be taxed
as short-term or long-term capital gain (depending on the applicable holding
period).
In addition, (i) officers and directors of the Company subject
to Section 16(b) of the Securities Exchange Act of 1934 may be subject to
special rules regarding the income tax consequences concerning their ISOs, (ii)
any entitlement to a tax deduction on the part of the company is subject to the
applicable federal tax rules (including, without limitation, Internal Revenue
Code Section 162(m) regarding the $1,0000,000 limitation on deductible
compensation), and (iii) the exercise of an ISO may have implications in the
computation of alternative minimum taxable income.
Non-qualified Stock Options. An optionee will not realize any
taxable income upon the grant of a non-qualified stock option and the Company
will not receive a deduction at the time of such grant unless such option has a
readily ascertainable fair market value (as determined under applicable tax law)
at the time of grant. Upon exercise of a non-qualified stock option, the
optionee generally will realize ordinary income in an amount equal to the excess
of the fair market value of the Class A common Stock on the date of exercise
over the exercise price. Upon a subsequent sale of the Class A Common Stock by
the optionee, the optionee will recognize short-term or long-term capital gain
or loss depending upon his or her holding period for the Class A Common Stock.
The Company will generally be allowed a deduction equal to the amount recognized
by the optionee as ordinary income.
In addition, (i) any officers and directors of the company
subject to Section 16(b) of the Securities Exchange Act of 1934 may be subject
to special tax rules regarding the income tax consequences concerning their
non-qualified stock options, and (ii) any entitlement to a tax deduction on the
part of the Company is subject to the applicable tax rules (including, without
limitation, Internal Revenue Code Section 162(m) regarding the $1,000,000
limitation on deductible compensation).
Restricted Shares. In general, the holder of restricted shares
will not realize taxable income at the time a restricted share is awarded. In
the year the restrictions on the restricted shares lapse, the holder will
generally recognize ordinary income equal to the fair market value of the Class
A Common Stock on the date the relevant restrictions lapse over the amount, if
any, paid for such stock. Alternatively, the holder of restricted shares may
elect to be taxed in the year of issuance pursuant to Internal Revenue Code
Section 83(b). In the event of such election the holder will recognize ordinary
income equal to the fair market value of the Class A Common Stock on the date of
issuance over the price, if any, paid for such stock.
Any gain or loss on the subsequent sale of Class A Common
Stock will generally be either long-term capital gain or loss or short-term
capital gain or loss (depending on the applicable holding period). The Company
will generally be entitled to an income tax deduction equal to the amount
recognized by the holder as ordinary income at the time of such recognition.
In addition, (i) if the Class A Common Stock transferred to
the holder is not subject to any restrictions, the holder generally will
recognize ordinary income at the time of transfer, (ii) any cash dividends,
retained distributions, dividend equivalents and cash awards are generally
taxable as ordinary income, (iii) officers and directors of the Company subject
to Section 16(b) of the Securities Exchange Act of 1934 may be subject to
special rules regarding the income tax consequences concerning their restricted
shares, and (iv) any entitlement to a tax deduction on the part of the Company
is subject to the applicable federal tax rules (including without limitation,
Internal Revenue Code Section 162(m) regarding the $1,000,000 limitation on
deductible compensation).
The foregoing description of Federal income tax consequences
of the Awards is intended merely as an aid for holders of Awards, and the
Company assumes no responsibility in connection with the income tax liability of
any such individual. Individuals are urged to obtain competent professional
advice regarding the applicability of Federal, state, and local tax laws.
4. The Awards are not subject to any of the requirements of
the Employee Retirement Income Security Act of 1974, as amended.
5. All documents incorporated by reference in Item 3 of Part
II of the Registration Statements on Form S-8 filed by the Company in connection
with the shares of Class A Common Stock to be issued in connection with an Award
are available without charge upon the oral or written request to the Company by
a holder of an Award. Such documents are also hereby incorporated by reference
into this Supplemental Information Memorandum. Additional information about the
Awards and any other documents required to be delivered to Award holders,
pursuant to Rule 428(b) promulgated under the Securities Act, may be obtained
without charge upon an Award holder's oral or written request to the Company.
All such requests for such information should be directed to John K. Lines,
General Counsel, Insignia Financial Group, Inc., One Insignia Financial Plaza,
Greenville, South Carolina 29602, telephone number (803) 239-1000.
Exhibit 23 - Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in (1) the Registration Statement
(Form S-8 No. 33-84700) pertaining to the registration of 300,000 shares (prior
to giving effect to the two-for-one stock split) of Class A Common Stock in the
Insignia Financial Group, Inc. 401-K Plan, (2) the Registration Statement (Form
S-8 No. 33-82414) pertaining to the registration of an additional 1,000,000
shares (prior to giving effect to the two-for-one stock split) of Class A Common
Stock under Insignia's 1992 Stock Incentive Plan, (3) the Registration Statement
(Form S-8 No. 33-79490) pertaining to the registration of 575,000 shares (prior
to giving effect to the two-for-one stock split) of Class A Common Stock, (4)
the Registration Statement (Form S-8 No. 33-55278) pertaining to the
registration of an additional 333,333 shares (prior to giving effect to the
two-for-one stock split) of Class A Common Stock under Insignia's 1992 Stock
Incentive Plan, (5) the Registration Statement (Form S-8 No. 333-07155)
pertaining to the registration of options to purchase 1,482,879 shares of Class
A Common Stock and the shares underlying such options pursuant to Insignia's
Non-Qualified Stock Option Agreements, (6) the Registration Statement (Form S-8
No. 333-09449) pertaining to the registration of 400,000 shares of Class A
Common Stock under Insignia's 1995 Non-Employee Director Stock Option Plan, (7)
the Registration Statement (Form S-8 No. 333-10685) pertaining to the
registration of an additional 2,000,000 shares of Class A Common Stock under
Insignia's 1992 Stock Incentive Plan, (8) the Registration Statement (Form S-8
No. 333-17791) pertaining to the registration of 728,000 shares of Class A
Common Stock, (9) the Registration Statement (Form S-3 Nos. 333-17595 and
333-17595-01) and related prospectus of Insignia Financial Group, Inc. and
Insignia Financing I for the registration of 2,990,000 Convertible Preferred
Securities of Insignia Financing I, 7,941,338 of Class A Common Stock of
Insignia Financial Group, Inc. and certain other securities (including shares of
Class A Common Stock) and (10) the Registration Statement (Form S-8 No.
333-33551) pertaining to the registration of an additional 583,334 shares of
Class A Common Stock under Insignia's 1992 Stock Incentive Plan of our report
dated February 13, 1998, except for Note 20, as to which the date is March 19,
1998 with respect to the consolidated financial statements of Insignia Financial
Group, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/Ernst & Young LLP
--------------------
ERNST & YOUNG LLP
Greenville, South Carolina
March 23, 1998
INSIGNIA FINANCIAL GROUP, INC.
(A Delaware corporation)
Subsidiary List As Of December 31, 1997
<TABLE>
<CAPTION>
DIRECT SUBSIDIARIES
<S> <C>
State of Incorporation
Entity ...................................................................................... or Formation
American Housing, L.L.C ..................................................................... Delaware Limited Liability Company
AmReal Corporation .......................................................................... South Carolina
AmReal Realty, Inc. ......................................................................... South Carolina
Barnes Morris & Foster, Inc. ................................................................ District of Columbia
(doing business in the states of Maryland,
Pennsylvania, Virginia & Washington, DC
as Insignia/Barnes, Morris)
Barnes Morris Pardoe ........................................................................ Delaware Limited Liability Company
& Foster Management Services, L.L.C ................................................
Beattie Place, L.L.C ........................................................................ Delaware Limited Liability Company
Compagnie di Amministazgione ................................................................ Italy
e Gastioni Immobiliare S.p.A .......................................................
(Note: 60% interest)
Compleat Resource Group, Inc. ............................................................... Delaware
Construction Interiors, Inc. ................................................................ Delaware
(doing business in Illinois as Interior Construction Corp.)
Corporate Relocation Management, Inc. ....................................................... Ohio
DBL Properties Corporation .................................................................. New York
Deforest Ventures II Corporation ............................................................ Delaware
Direct Access Association, Inc. ............................................................. Missouri
E.S.G. Operating Co., Inc. .................................................................. New York
Edward S. Gordon Co., Inc. of Long Island, L.L.C ............................................ New York Limited Liability Company
FC&S Management Company ..................................................................... Illinois
FMG Acquisition I, L.L.C .................................................................... Delaware Limited Liability Company
First Atlantic Management Corporation ....................................................... Delaware
First Ohio Escrow Corporation, Inc. ......................................................... Ohio
First Ohio Mortgage Corporation, Inc. ....................................................... Ohio
Forum Properties, Inc. ...................................................................... Oregon
Fox Assignor, Inc. .......................................................................... California
GP Services, Inc. ........................................................................... Delaware
GP Services II, Inc. ........................................................................ South Carolina
GP Services VII, Inc. ....................................................................... South Carolina
GP Services X, Inc. ......................................................................... South Carolina
ICIG Directives, L.L.C ...................................................................... Delaware
IFC Acquisition Corp. I ..................................................................... Delaware
IFC Acquisition Corp. II .................................................................... Delaware
IFGP Corporation ............................................................................ Delaware
IFSE Holding Co. ............................................................................ Delaware
IHMG of Alabama, Inc. ....................................................................... Alabama
IMH, Inc. ................................................................................... Delaware
IPCG, Inc. .................................................................................. Delaware
(formerly Insignia-Paragon Commercial Group, Inc.)
IPGP, Inc. .................................................................................. Delaware
IPLP Acquisition I L.L.C .................................................................... Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIRECT SUBSIDIARIES - (continued)
<S> <C>
State of Incorporation
Entity ...................................................................................... or Formation
- --------------------------------------------------------------------------------------------- ----------------------------------
IPT I L.L.C ................................................................................. Delaware
ISPMC, Inc. ................................................................................. Delaware
Insignia Allegiance Management, Inc. ........................................................ Delaware
Insignia/Arrow, Inc. ........................................................................ Delaware
Insignia Capital Advisors, Inc. ............................................................. South Carolina
(formerly Insignia Mortgage & Investment Company, Inc.)
Insignia Capital Corporation ................................................................ Delaware
Insignia/ESG, Inc. .......................................................................... Delaware
(formerly Insignia Commercial Group, Inc., name change 1/22/98)
Insignia/ESG of Alabama, Inc. ............................................................... Delaware
(formerly Insignia Commercial Group of Alabama, Inc., name change 2/2/98)
Insignia/ESG, of California, Inc. ........................................................... Delaware
(formerly Insignia Commercial Group of California, Inc. name change 2/2/98)
Insignia/ESG of Colorado, Inc. .............................................................. Delaware
(formerly Insignia Commercial Group of Colorado, Inc. name change pending)
Insignia/ESG of Texas, Inc. ................................................................. Delaware
(formerly Insignia Commercial Group of Texas, Inc. name change 2/2/98)
Insignia Commercial Group West, Inc. ........................................................ Delaware
Insignia Commercial Investments Group, Inc. ................................................. Delaware
Insignia Commercial Management, Inc. ........................................................ Delaware
Insignia Construction Management Services - ................................................. Delaware
New York, Inc. .....................................................................
Insignia EC Corporation ..................................................................... Delaware
Insignia/Edward S. Gordon Co., Inc. ......................................................... Delaware
(merged into Insignia/ESG, Inc. in 1998)
Insignia Financing I ........................................................................ Delaware Trust
Insignia Hospitality Management Group, Inc. ................................................. Delaware
Insignia Properties, L. P ................................................................... Delaware Limited Partnership
Insignia Properties Trust ................................................................... Maryland Business Trust
Insignia RO, Inc. ........................................................................... Delaware
Insignia Related, Inc. ...................................................................... Delaware
Insignia Related, L. P ...................................................................... Delaware Limited Partnership
Insignia Residential Corporation ............................................................ Delaware
(formerly Insignia Management Corporation)
Insignia Residential Group of Colorado, Inc. ................................................ Colorado
(formerly Insignia Management and Commercial Groups of Colorado, Inc.)
Insignia Residential Group, Inc. ............................................................ Delaware
(formerly Insignia Management Services - New York, Inc.)
Insignia Residential Group, L.P. ............................................................ Delaware Limited Partnership
(formerly Insignia Management Group, L. P.)
Insignia Residential Group of Alabama, Inc. ................................................. Delaware
(formerly Insignia Management Group of Alabama, Inc.)
Insignia Residential Group of California, Inc. ............................................. Delaware
(formerly Insignia Management Group of California, Inc.)
Insignia Residential Group of Texas, Inc. .................................................. Delaware
(formerly Insignia Management Group of Texas, Inc.)
Insignia Residential Management, Inc. ....................................................... Delaware
Insignia Retail Group, Inc. ................................................................ Delaware
Insignia Rooney Management, Inc. ............................................................ Delaware
Insignia Transport, Inc. .................................................................... Delaware
Insignia (UK) Holdings Limited .............................................................. United Kingdom
Kreisel Company, Inc. ....................................................................... New York
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIRECT SUBSIDIARIES - (continued)
<S> <C>
State of Incorporation
Entity ...................................................................................... or Formation
- --------------------------------------------------------------------------------------------- ----------------------------------
Lifton/MAQ S.E. Investments II, Inc. ........................................................ Georgia
Maine Maintenance Corporation ............................................................... Delaware
Market Ventures, L.L.C ...................................................................... Delaware Limited Liability Company
MAP VII Acquisition Corporation ............................................................ Delaware
MAQ/Lifton Acquisition Corp. ................................................................ Florida
Metropolitan Acquisition VII, L.L.C ......................................................... Delaware Limited Liability Company
Metropolitan Opportunity Partners, Inc. ..................................................... Delaware
Metropolitan Opportunity Partners I, L.L.C .................................................. Delaware Limited Liability Company
NPI-AP Management, L. P ..................................................................... Delaware Limited Partnership
NPI-CL Management, L. P ..................................................................... Delaware Limited Partnership
NPI Capital Corporation ..................................................................... Florida
NPI Property Management Corporation ......................................................... Florida
NPI Realty Advisors, Inc. ................................................................... Florida
NPI Realty Management Corp. ................................................................. Florida
National Property Investors, Inc. ........................................................... Delaware
O'Donnell Property Services, Inc. ........................................................... California
Property Consulting Services, Inc. .......................................................... Delaware
RJN Corporation ............................................................................. Delaware
Realty One, Inc. ............................................................................ Ohio
Related Management Company of Florida ....................................................... Florida General Partnership
Residents Direct Access Association, Inc. ................................................... Missouri
Rostenberg-Doern Management Corp. ........................................................... New York
SF General, Inc. ............................................................................ Delaware
S.I.A., Inc. ................................................................................ South Carolina
SP IV Acquisition, L.L.C .................................................................... Delaware Limited Liability Company
Security Management Inc. .................................................................... Washington
Soren Management Inc. ....................................................................... New York
Southwest Associates ........................................................................ Texas Limited Partnership
USS Depositary, Inc. ........................................................................ South Carolina
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. December 31, 1997 Form 10-K and is qualified
in its entirety by reference to such 10-K filing.
</LEGEND>
<CIK> 0000870480
<NAME> Insignia Financial Group, Inc.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
Restated Restated Restated
<PERIOD-TYPE> 12-mos 12-mos 12-mos
<FISCAL-YEAR-END> 12-31-97 12-31-96 12-31-95
<PERIOD-START> 01-01-97 01-01-96 01-01-95
<PERIOD-END> 12-31-97 12-31-96 12-31-95
<CASH> 88,847 54,614 49,846
<RECEIVABLES> 122,180 46,040 26,445
<PP&E> 19,011 12,083 7,700
<Total Assets> 800,223 492,402 245,409
<BONDS> 189,704 69,140 32,996
144,065 144,169 0
<COMMON> 302 289 259
<OTHER-SE> 237,607 217,616 156,754
<TOTAL-LIABILITY-AND-EQUITY> 800,223 492,402 245,409
<TOTAL-REVENUES> 400,843 227,074 123,032
<TOTAL-COSTS> 315,653 164,830 85,707
<OTHER-EXPENSES> 56,361 34,182 22,513
<INTEREST-EXPENSE> 9,353 14,730 7,049
<INCOME-PRETAX> 17,055 14,946 10,093
<INCOME-TAX> 6,822 5,680 3,835
<EXTRAORDINARY> 0 (702) (452)
<NET-INCOME> 10,233 8,564 5,806
<EPS-PRIMARY> .35 .30 .21
<EPS-DILUTED> .32 .26 .20
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. December 31, 1997 Form 10-K and is qualified
in its entirety by reference to such 10-K filing.
</LEGEND>
<CIK> 0000870480
<NAME> Insignia Financial Group, Inc.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
Restated Restated Restated
<PERIOD-TYPE> 9-mos 6-mos 3-mos
<FISCAL-YEAR-END> 12-31-97 12-31-97 12-31-97
<PERIOD-START> 01-01-97 01-01-97 01-01-97
<PERIOD-END> 9-30-97 6-30-97 3-31-97
<CASH> 89,427 77,083 69,821
<RECEIVABLES> 73,657 58,536 52,455
<PP&E> 15,170 13,339 12,195
<Total Assets> 568,768 530,224 486,809
<BONDS> 58,417 58,674 68,905
143,993 143,978 143,943
<COMMON> 291 292 290
<OTHER-SE> 222,788 224,118 220,804
<TOTAL-LIABILITY-AND-EQUITY> 568,768 530,224 486,809
<TOTAL-REVENUES> 254,630 154,527 67,912
<TOTAL-COSTS> 197,921 118,766 51,717
<OTHER-EXPENSES> 39,738 21,540 10,339
<INTEREST-EXPENSE> 5,843 3,942 2,005
<INCOME-PRETAX> 7,879 7,630 3,340
<INCOME-TAX> 3,152 3,052 1,336
<EXTRAORDINARY> 0 0 0
<NET-INCOME> 4,727 4,578 2,004
<EPS-PRIMARY> .16 .16 .07
<EPS-DILUTED> .15 .14 .06
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. December 31, 1997 Form 10-K and is qualified
in its entirety by reference to such 10-K filing.
</LEGEND>
<CIK> 0000870480
<NAME> Insignia Financial Group, Inc.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
Restated Restated Restated
<PERIOD-TYPE> 9-mos 6-mos 3-mos
<FISCAL-YEAR-END> 12-31-96 12-31-96 12-31-96
<PERIOD-START> 01-01-96 01-01-96 01-01-96
<PERIOD-END> 9-30-96 6-30-96 3-31-96
<CASH> 60,131 57,366 56,865
<RECEIVABLES> 30,874 19,101 12,764
<PP&E> 11,282 10,204 8,291
<Total Assets> 471,889 473,720 372,363
<BONDS> 205,590 215,312 151,086
0 0 15,000
<COMMON> 288 287 260
<OTHER-SE> 213,125 212,121 159,554
<TOTAL-LIABILITY-AND-EQUITY> 471,889 473,720 372,363
<TOTAL-REVENUES> 149,204 83,319 40,221
<TOTAL-COSTS> 106,570 54,273 26,552
<OTHER-EXPENSES> 25,477 16,768 11,501
<INTEREST-EXPENSE> 11,942 6,667 3,311
<INCOME-PRETAX> 8,097 7,690 3,420
<INCOME-TAX> 3,077 2,922 1,300
<EXTRAORDINARY> 0 0 0
<NET-INCOME> 5,020 4,768 2,120
<EPS-PRIMARY> .18 .18 .08
<EPS-DILUTED> .16 .15 .07
</TABLE>
