UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from........to........
Commission file number 1-13962
INSIGNIA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3591193
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089 29602
Greenville, South Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (864) 239-1000
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
As of June 30, 1998, there were outstanding 31,820,672 shares of Class A Common
Stock.
<PAGE>
INSIGNIA FINANCIAL GROUP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
Page No.
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the
three and six months ended June, 30, 1998 and 1997 2
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Cash Flow
for the three and six months ended June 30, 1998
and 1997 4
Notes to Condensed Consolidated Financial Statements 5 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
a) Income Statement
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues
<S> <C> <C> <C> <C>
Fee based services $146,444 $83,854 $273,206 $149,276
Interest 1,536 1,007 2,878 1,741
Other 960 108 1,543 281
Apartment property revenues 1,856 1,646 3,627 3,229
150,796 86,615 281,254 154,527
Costs and expenses
Fee based services 123,644 67,049 228,454 118,766
Administrative 4,283 1,958 8,179 4,240
Apartment property 846 784 1,736 1,516
Interest 5,420 1,565 9,492 3,198
Apartment property interest 422 372 828 744
Depreciation and amortization 10,011 8,218 20,021 15,304
Apartment property depreciation 329 241 600 480
Merger related expenses 2,901 -- 4,937 --
147,856 80,187 274,247 144,248
2,940 6,428 7,007 10,279
Equity earnings - limited partnership
interests 10,431 569 13,624 3,636
Minority interests in consolidated
subsidiaries (4,723) (2,707) (8,497) (6,285)
Income before income taxes 8,648 4,290 12,134 7,630
Provision for income taxes 3,891 1,716 5,460 3,052
Net income $ 4,757 $ 2,574 $ 6,674 $ 4,578
Per share amounts - basic: $.15 $.09 $.21 $.16
Per share amounts - assuming dilution: $.14 $.08 $.19 $.14
Weighted average common shares 34,808,146 31,640,668 34,253,189 31,797,433
and assumed conversions
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
b) Balance Sheet
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) Note)
Assets
<S> <C> <C>
Cash and cash equivalents $ 57,807 $ 88,847
Receivables 147,569 122,180
Property and equipment 24,414 19,011
Investments in real estate limited partnerships 282,599 215,735
Apartment property 25,808 22,357
Property management contracts 134,344 147,256
Costs in excess of net assets of acquired
businesses 245,391 158,524
Other assets 36,257 26,313
Total assets $954,189 $800,223
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $16,205 $ 13,705
Commissions payable 54,467 51,285
Accrued and sundry liabilities 105,658 102,009
Notes payable 267,384 170,404
Non-recourse mortgage notes payable 21,951 19,300
Total liabilities 465,665 356,703
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 144,210 144,065
Minority interests in consolidated subsidiaries 66,484 61,546
Stockholders' Equity:
Common stock, class A, par value $.01 per share -
authorized 100,000,000 shares, 31,987,072 issued
and 31,820,672 outstanding (1998) and 30,159,161
issued and outstanding (1997) shares 318 302
Additional paid-in capital 234,819 201,597
Retained earnings 42,693 36,010
Total stockholders' equity 277,830 237,909
Total liabilities and stockholders' equity $954,189 $800,223
<FN>
NOTE:The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
c) Statement of Cash Flow
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
Operating Activities
<S> <C> <C>
Net income $ 6,674 $ 4,578
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 20,021 15,304
Apartment property depreciation 600 480
Equity in earnings of partnerships (13,624) (3,636)
Minority interests in consolidated subsidiaries 8,497 6,285
Foreign currency translation 9 --
Changes in operating assets and liabilities:
Receivables 2,768 (9,222)
Other assets (6,481) (3,815)
Accrued compensation (9,607) (3,077)
Accounts payable and accrued expenses (12,270) 4,207
Commissions payable 516 8,201
Net cash (used in) provided by operating
activities (2,897) 19,305
Investing activities
Additions to property and equipment, net (6,273) (2,507)
Payments made for acquisition of management
contracts and acquired businesses (50,846) (8,312)
Net increase in mortgage loans (2,296) --
Proceeds from Balcor dispositions 196 4,069
Purchase of real estate limited partnership
interests (54,512) (22,831)
Investment in apartment property, net of
acquired cash (3,804) --
Distributions from partnerships 9,804 29,579
Advances made under note agreements (12,145) (12,265)
Collections on notes receivable 1,629 1,263
Net cash used in investing activities (118,247) (11,004)
Financing activities
Proceeds from issuance of common stock of
subsidiary -- 31,710
Payments on non-recourse mortgage notes
payable (9) --
Payments on notes payable (1,642) (11,543)
Payment of distributions on trust based
convertible preferred securities (5,012) (5,001)
Proceeds from exercise of stock options
and warrants 7,140 1,769
Proceeds from notes payable 89,660 --
Proceeds from refinancing of non-recourse
mortgage notes payable 2,660 --
Distributions made to minority interests (2,631) (1,571)
Debt and stock issuance costs (62) (1,196)
Net cash provided by financing activities 90,104 14,168
(Decrease) increase in cash and cash equivalents (31,040) 22,469
Cash and cash equivalents at beginning of period 88,847 54,614
Cash and cash equivalents at end of period $ 57,807 $77,083
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Insignia Financial Group, Inc. (the "Company" or "Insignia") is a Delaware
corporation incorporated in July 1990. The Company is a fully integrated
real estate services company with operations throughout the United States
and the United Kingdom. Insignia provides property management, leasing,
tenant representation, investment, asset management, partnership
administration, investor services, consulting, brokerage, development and
investment banking services to owners and users of real estate. In
addition, Insignia has substantial ownership of real estate, primarily
investments in partnerships, through its REIT subsidiary Insignia
Properties Trust and co-investments with institutional partners.
2. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
3. In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented and, where appropriate,
restated to conform to the Statement 128 requirement.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(Thousands of Dollar, except share data)
Basic
<S> <C> <C> <C> <C>
Average common shares outstanding 31,579 29,105 31,100 29,036
Assumed conversions -- -- - --
Total 31,579 29,105 31,100 29,036
Net income $ 4,757 $ 2,574 $ 6,674 $ 4,578
Per share amounts - basic $.15 $.09 $.21 $.16
Diluted
Average common shares outstanding 31,579 29,105 31,100 29,036
Assumed conversions 3,229 2,536 3,153 2,761
Total 34,808 31,641 34,253 31,797
Net income $ 4,757 $ 2,574 $ 6,674 $ 4,578
Per share amounts - diluted $.14 $.08 $.19 $.14
</TABLE>
4. In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, reported separately in shareholders' equity, to be included in
other comprehensive income. The Company adopted Statement 130 as of January
1, 1998. The impact of this adoption on the Company's net income and
shareholders' equity for all periods presented was immaterial.
5. In 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"),
which is effective for financial statements for fiscal years beginning
after December 15, 1998. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application should
be reported as the cumulative effect of a change in accounting principle
and expensed in the first quarter in the year of adoption. At June 30,
1998, Insignia Properties Trust (IPT) had approximately $1.0 million
capitalized as organizational costs that would be affected by the
requirements of SOP 98-5.
6. The following is a summary of the Company's material contingencies as of
June 30, 1998:
1996 Tender Offer Litigation
In May 1996, Walton Street Capital Acquisition II, LLC ("Walton Street"),
together with certain Insignia affiliates, commenced tender offers for
limited partner interests in ten real estate limited partnerships
syndicated by The Balcor Company ("Balcor"). In May 1996, certain persons
claiming to be holders of limited partner interests commenced a lawsuit
entitled Chipain, Tom, v. Walton Street Capital Acquisition II, LLC, in the
Circuit Court of Cook County, Illinois, County Department, Chancery
Division, on behalf of themselves, on behalf of a putative class of
plaintiffs, and, as amended, derivatively on behalf of the
Balcor-syndicated partnerships, challenging the actions of the defendants
(including the Company, an officer of the Company and certain affiliates,
Walton Street and the general partners of the Balcor-syndicated
partnerships) in connection with the tender offers and certain other
matters.
The complaint, as amended, contained allegations that the tender offers
were inadequate and coercive based, in part, upon information allegedly
obtained by Insignia in violation of its fiduciary duties. Defendants
promptly moved to dismiss the complaint and on June 5, 1996 the court
dismissed the complaint as to Insignia and Walton Street, with leave to
replead. On June 11, 1996 plaintiffs filed an amended class and derivative
action complaint, repeating the same allegations as in their initial
complaint, and recasting some as derivative, rather than direct class,
claims. Defendants moved to dismiss the amended complaint and on June 18,
1996, the court again dismissed plaintiffs' amended complaint as to
Insignia and Walton Street.
On June 14, 1996 a second class and derivative suit, similar in material
respects to the Chipain litigation, was filed in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division. That complaint,
entitled Sandra Dee v. Walton Street Capital Acquisition II, LLC, et al.,
contained substantially the same allegations as the Chipain complaints and
asserted additionally that the tender offers violated certain state
securities and consumer statutes. Pursuant to the court's orders
consolidating the Chipain and Dee complaints with another action which does
not name Insignia, a new amended and consolidated class and derivative
action complaint was filed on July 25, 1996. The plaintiffs in the Chipain
action are not parties to this latest complaint.
On August 16, 1996 Insignia moved to dismiss the amended and consolidated
class and derivative action complaint. The motion was heard by the court on
September 27, 1996 at which time the court granted leave to the plaintiff
to (i) withdraw its pending complaint and (ii) serve a second amended and
consolidated class and derivative action complaint. On October 8, 1996
plaintiffs filed a second amended and consolidated class and derivative
action complaint which added claims of alleged antitrust injury and unjust
enrichment. On October 25, 1996 Insignia moved to dismiss the second
amended and consolidated class action complaint. That motion was heard by
the court in December 1996. On December 18, 1996 the court issued a
decision granting Insignia's motion to dismiss. By order dated January 7,
1997 the court dismissed the second amended and consolidated class action
complaint with prejudice. Plaintiffs filed a notice of appeal in the Dee
action on February 14, 1997. Plaintiffs perfected their appeal, which was
argued in March 1998. The appellate court has not yet rendered its decision
on the appeal.
1998 Litigation
On March 24, 1998, certain persons claiming to own limited partner
interests in certain limited partnerships whose general partners (the
"General Partners") are affiliates of Insignia (the "Partnerships") filed a
purported class and derivative action in California Superior Court in the
County of San Mateo against Insignia, the General Partners, Apartment
Investment and Management Company ("AIMCO"), certain persons and entities
who purportedly formerly controlled the General Partners, and additional
entities affiliated with individuals who are officers, directors and/or
principals of several of the defendants. The complaint contains allegations
that, among other things, (i) the defendants breached their fiduciary
duties to the plaintiffs by selling or agreeing to sell their "fiduciary
positions" as stockholders, officers and directors of the General Partners
for a profit and retaining said profit rather than distributing it to the
plaintiffs; (ii) the defendants breached their fiduciary duties by
mismanaging the Partnerships and misappropriating the assets of the
Partnerships by (a) manipulating the operations of the Partnerships to
depress the trading price of limited partnership units (the "Units") of the
Partnerships; (b) coercing and fraudulently inducing unit holders to sell
Units to certain of the defendants at depressed prices; and (c) using the
voting control obtained by purchasing Units at depressed prices to entrench
certain of the defendants' positions of control over the Partnerships; and
(iii) the defendants breached their fiduciary duties to the plaintiffs by
(a) selling assets of the Partnerships such as mailing lists of
unitholders; and (b) causing the General Partners to enter into exclusive
arrangements with their affiliates to sell goods and services to the
partnerships, the unit holders and tenants of Partnership properties. The
complaint also alleges that the foregoing allegations constitute violations
of various California securities, corporate and partnership statutes, as
well as conversion and common law fraud. The complaint seeks unspecified
compensatory and punitive damages, an injunction blocking the sale of
control of the General Partners to AIMCO and a court order directing the
defendants to discharge their fiduciary duties to the plaintiffs. On June
25, 1998, Insignia, the General Partners and certain other defendants
served a demurrer and a motion to strike the complaint. In lieu of
responding to defendants' demurrer and motion, plaintiffs filed an amended
complaint. Insignia believes the suit to be without merit and intends to
defend the suit vigorously.
On July 30, 1998, certain entities claiming to own limited partnership
interests in certain limited partnerships whose general partners are
affiliates of Insignia filed a complaint in the Superior Court of the State
of California, County of Los Angeles. The action involves 44 real estate
limited partnerships (each named as a defendant) in which the plaintiffs
allegedly own interests and which Insignia affiliates allegedly manage or
control (the "Subject Partnerships"). The complaint names as defendants
Insignia, IPT, Insignia Properties, L.P. and several Insignia affiliates
alleged to be managing partners of the defendant limited partnerships.
Plaintiffs allege that they have requested from, but have been denied by
each of the Subject Partnerships, lists of their respective limited
partners for the purpose of making tender offers to purchase up to 4.9% of
the limited partner units of each of the Subject Partnerships. The
complaint also alleges that certain of the defendants made tender offers to
purchase limited partner units in many of the Subject Partnerships, with
the alleged result that plaintiffs have been deprived of the benefits they
would have realized from ownership of the additional units. The plaintiffs
assert eleven causes of action, including breach of contract, unfair
business practices, and violations of the partnership statutes of the
states in which the Subject Partnerships are organized. Plaintiffs seek
compensatory, punitive and treble damages. Insignia was only recently
served with the complaint and has not yet responded to it. The Company
believes the claims to be without merit and intends to defend the action
vigorously.
The Company and certain subsidiaries are defendants in lawsuits arising in
the ordinary course of business. Such lawsuits are primarily insured claims
arising from accidents at managed properties. Claims may demand substantial
compensatory and punitive damages.
Management believes that the aforementioned contingencies will be resolved
without material loss to the Company or its subsidiaries.
7. Acquisitions
Richard Ellis Group Limited
In February 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 total purchase price was approximately
$82.9 million, of which $14.7 million is contingent on the future
performance of Richard Ellis. The transaction was completed on February 26,
1998. The Company funded the acquisition by borrowing approximately $35
million from its revolving credit facility, issuing 617,371 shares of Class
A Common Stock, and assuming existing stock options which will enable
Richard Ellis employees to purchase 853,741 shares of the Company's Class A
Common Stock. The acquisition was accounted for as a purchase.
Hotel Partners
On May 11, 1998, the Company announced that it had acquired Hotel Partners
("Hotel Partners"), an international brokerage firm focused exclusively on
the hospitality segment of the real estate industry. The total purchase
price is estimated at approximately $14.2 million with $7.0 million paid in
cash at closing and potential additional consideration contingent upon the
performance of such unit over a five-year period. Hotel Partners operates
as an integral part of the Capital Advisors Group of Insignia/ESG, Inc.
("Insignia/ESG"), which focuses on investment sales and debt placement
internationally. During 1997, Hotel Partners was responsible for the sale
of 115 hotel, motel and resort properties ranging in price from $550,000 to
$150 million. Hotel Partners, based in Chicago, also has offices in New
York, London, Frankfurt, Tokyo, Singapore, Hong Kong, Los Angeles, Dallas,
Miami, Atlanta, Honolulu and Boston. The acquisition was accounted for as a
purchase.
Jackson Cross Company
On June 15, 1998, the Company completed the acquisition of Jackson Cross
Company ("Jackson Cross"), a prominent commercial real estate service firm
with operations primarily in the greater Philadelphia area. The total
purchase consideration paid by the Company for Jackson Cross was
approximately $9.1 million, consisting of $8.6 million paid in cash and
$500,000 in guaranteed deferred payments. Additional payments of up to $5.4
million is contingent on the future performance of Jackson Cross. The
acquisition was accounted for as a purchase.
8. Merger and Spin-off
On March 17, 1998, the Company entered into an Agreement and Plan of Merger
(as subsequently amended and restated, the "Merger Agreement") with AIMCO,
a Maryland corporation, 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 the approval of the stockholders
of the Company (but not the approval of the stockholders of AIMCO).
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
a number of shares of Class E Cumulative Convertible Preferred Stock, par
value $.01 per share, of AIMCO (the "Class E Preferred") equal to
approximately $303 million divided by the AIMCO Index Price (as defined in
the Merger Agreement). In addition to receiving the same dividends as
holders of AIMCO Common Stock, holders of Class E Preferred are entitled to
receive a preferred dividend of approximately $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 shares of Class E Preferred issued in the Merger will be
determined by a formula based on the AIMCO Index Price, subject to a fixed
maximum AIMCO Index Price of $38. If the AIMCO Index Price during that
period is less than $36.50, AIMCO may elect to pay up to $15 million of the
purchase price in cash.
In addition, AIMCO and its subsidiaries will assume approximately $308
million in outstanding indebtedness and other liabilities of the Company
and its subsidiaries and $149.5 million (liquidation value) of the 6.5%
Trust Convertible Preferred Securities issued by Insignia Financing I, a
subsidiary of the Company.
If the stockholders of AIMCO do not approve the Merger, the Merger may
nonetheless be consummated. However, instead of receiving only Class E
Preferred, holders of the Company's Class A Common Stock would receive a
number of shares of Class E Preferred approximately equal to $203 million
divided by the AIMCO Index Price and a number of shares of Class F
Cumulative Convertible Preferred Stock, par value $.01 per share, of AIMCO
(the "Class F Preferred") approximately equal to $100 million divided by
the AIMCO Index Price. In either case, holders of Class E Preferred would
be entitled to receive the $50 million preferred dividend and AIMCO and its
subsidiaries would assume the $308 million of indebtedness and other
liabilities of the Company and the $149.5 million of Trust Convertible
Preferred Securities issued by Insignia Financing I. Holders of Class 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 liquidation value of the Class 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 AIMCO Common Stock on a one-for-one basis, subject to certain
antidilution adjustments.
The Merger Agreement also provides that following the Merger, AIMCO is
required to offer to purchase (by merger) the outstanding shares of
beneficial interest of IPT, a majority owned subsidiary of the Company, not
owned by the Company or its subsidiaries at a price of at least $13.25 per
IPT share payable in cash. IPT is a 75% owned subsidiary of the Company;
the 25% interest of IPT not owned by the Company is valued at an aggregate
of approximately $100 million, assuming a value of $13.25 per share.
As a condition to execution of the Merger Agreement, certain of the
Company's executive officers executed voting agreements and irrevocable
proxies in favor of AIMCO, pursuant to which each of the foregoing
individuals agreed to vote the shares of the Company's Class A Common Stock
owned of record 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.
Prior to the Merger, the Company will spin off its commercial businesses
through a pro rata distribution (the "Distribution") to it stockholders of
all of the outstanding Common Stock, par value $.01 per share ("Holdings
Common Stock"), of Insignia/ESG Holdings, Inc., a Delaware corporation and
a wholly owned subsidiary of the Company ("Holdings"). Holdings will
consist of Insignia/ESG, the Company's commercial real estate services
unit, throughout the U.S., and will include Richard Ellis in the United
Kingdom and Insignia/CAGISA in Italy; Insignia Residential Group, a New
York based cooperative and condominium management company; Realty One, a
full service residential real estate brokerage firm headquartered in
Cleveland, Ohio; and other select holdings (collectively, the "Holdings
Businesses").
Most of Insignia's existing liabilities, other than those directly relating
to the Holdings Businesses, will remain with Insignia after the
Distribution (subject to certain guarantees and pledges of Holdings and its
subsidiaries pending the completion of the Merger or refinancing thereof by
Insignia). Assuming the Merger is consummated, those liabilities will be
assumed by AIMCO and Holdings will be released from all guarantees, liens
and pledges in favor of Insignia's revolving credit facility.
Subject to receipt of Insignia stockholder approval and the satisfaction of
certain other conditions, Insignia will effect the Distribution by
distributing to each record holder of Insignia Common Stock as of September
15, 1998 (the "Distribution Record Date") certificates representing that
number of whole shares of Holdings Common Stock equal to two-thirds of the
number of shares of Insignia Common Stock held by such holder. It is
currently anticipated that the Distribution will be effected as soon as
practicable after approval thereof at the Insignia Meeting. In the event
that Insignia stockholders approve the Distribution but not the Merger
Agreement, the Distribution will nonetheless be consummated if the Insignia
Board determines that the conditions to the Distribution have been
satisfied, The Holdings Common Stock has been approved for listing on the
NYSE, subject to official notice of issuance and approval of the
Distribution by Insignia stockholders, under the symbol "IEG." Consummation
of the Distribution is not conditioned upon approval or consummation of the
Merger.
In connection with the Merger, Holdings will assume certain existing
options and warrants to purchase shares of Insignia Common Stock. It is
estimated that following the Distribution, such options and warrants will
represent the right to purchase approximately 3.86 million shares of
Holdings Common Stock. The precise number of shares underlying certain of
such options and warrants and the exercise prices thereof will depend in
part upon the fair market value of Holdings Common Stock following the
Distribution, and thus is indeterminable at this time. Such options and
warrants are in addition to the approximately 1,100,000 options to purchase
Holding Common Stock to be granted under the Holdings 1998 Stock Incentive
Plan upon consummation of the Distribution.
9. Trust Based Convertible Preferred Securities
In connection with the Distribution, Insignia anticipates distributing to
record holders of the Convertible Preferred Securities ("Preferred Shares")
on the Distribution Record Date warrants to purchase approximately
1,196,000 shares of Holdings Common Stock (four warrants for each $500
liquidation amount of Convertible Preferred Securities held by them). Each
warrant will represent the right to purchase one share of Holdings Common
Stock and will have an exercise price of 120% of the market price of
Holdings Common Stock following the Distribution. The term of each warrant
will be five years, and no warrant will be exercisable before two years
after it is granted. Immediately prior to the warrant distribution,
Insignia will purchase the warrants from Holdings for approximately $8.5
million, which represents the estimated aggregate fair market value of the
warrants. The value was determined using the Black-Scholes method, based on
the following assumptions: (i) no dividends are paid on Holdings Common
Stock, (ii) an exercise price equal to 120% of the market price, (iii) a
five-year term, and (iv) 30% volatility of the Holdings Common Stock.
The Insignia Board will formally declare and authorize Insignia to effect
the warrant distribution if the Distribution has occurred and the Insignia
Board determines, among other things, that (i) the conditions to the Merger
have been satisfied and (ii) the closing of the Merger is imminent.
Under the terms of the Merger Agreement with AIMCO, the Preferred Shares
would become an obligation of AIMCO and would become convertible into AIMCO
securities, as Insignia Financing I would become a subsidiary of AIMCO.
Pursuant to the trust indenture governing the Preferred Shares, prescribed
adjustments to the conversion price would occur both as a result of the
Distribution and as a result of the Merger.
10. Other Matters
On July 18, 1997, IPT, Insignia and Angeles Mortgage Investment Trust, an
unincorporated California business trust ("AMIT"), entered into a
definitive merger agreement pursuant to which AMIT is to be merged with and
into IPT, with IPT being the surviving entity, in a stock for stock
transaction (the "AMIT Merger"). AMIT is a public company whose Class A
Common Shares trade on the American Stock Exchange under the symbol ANM.
Insignia and its affiliates currently own 96,800 (or approximately 3.7%) of
the 2,617,000 outstanding Class A shares of AMIT and all of the 1,675,113
outstanding Class B shares of AMIT. If the AMIT Merger is consummated, IPT
will become a publicly traded company shares (IPT's shares have been
approved for listing on the American Stock Exchange under the symbol "FFO",
subject to consummation of the AMIT Merger) and it is anticipated that
Insignia and its affiliates will own approximately 57% of post-merger IPT.
The former AMIT shareholders (other than Insignia and its affiliates) will
own approximately 16% of post-merger IPT, and the current unaffiliated
shareholders of IPT will own the remaining 27% of post-merger IPT. The AMIT
Merger is expected to be completed in the third quarter of 1998. However,
consummation of the AMIT Merger is subject to several conditions, including
approval of the AMIT Merger Agreement and the AMIT Merger by the
shareholders of AMIT. Accordingly, there can be no assurance as to when the
AMIT Merger will occur, or that it will occur at all.
11. During the six months ended June 30, 1998, the Company had the following
changes in the equity accounts:
a) Exercise of 939,140 stock options and 105,000 warrants representing
1,044,140 shares of Class A Common Stock at exercise prices ranging
from $0.01 to $17.69 per share.
b) Net income of $6,674,000 for the six months ended June 30, 1998.
c) Accrued compensation of $1,232,000 relating to restricted stock
awards.
d) Issuance of 617,371 shares at $21.12 and the assumption of 853,741
options with regard to the Richard Ellis acquisition.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets increased by $154 million from December 31, 1997 to $954
million at June 30, 1998. The major source of increase was acquisitions,
including Richard Ellis, Hotel Partners and Jackson Cross, which added $87
million to cost in excess of net assets of acquired businesses. Investments in
limited partnerships also increased by $67 million. This increase represents
purchases by IPT of $24 million as well as additional co-investments,
undistributed equity earnings and acquisitions of property for development.
Liabilities increased by $109 million to finance the growth in assets, with
substantially all of the increase arising from increases in Notes Payable from
draws under Insignia's revolving credit facility to finance acquisitions. The
remainder of the asset growth was financed with equity growth, including equity
issued in the Richard Ellis acquisition, exercise of stock options and retained
earnings.
Results of Operations
The Company posted increases in revenues, net income and diluted income per
share of 74%, 85% and 75%, respectively for the second quarter of 1998. The
increases for the first half were 82%, 46% and 36%, respectively. These high
growth percentages are attributable to acquisitions, the largest of which were
Richard Ellis in February 1998 and Realty One in October 1997, favorable real
estate markets in the United States and United Kingdom, and a gain on sale of
property by IPT in June 1998. Net income and diluted earnings per share were
negatively impacted by merger related expenses pertaining to the previously
announced spinoff of certain businesses and merger of the remainder of the
Company with AIMCO.
Insignia uses Net EBITDA as a primary indicator of its financial
performance. Net EBITDA represents earnings before interest, taxes, depreciation
and amortization from Insignia's service businesses ("EBITDA") plus funds from
operations from Insignia's real estate ownership businesses ("FFO") minus
financing costs, which consists of interest expense on debt and distributions on
preferred trust based securities. FFO excludes gains on property sales and FFO
attributable to minority interests, and Net EBITDA and EBITDA for 1998 exclude
the deduction for merger related expenses.
Net EBITDA, before merger related expenses, increased by 39% to $22 million
for the second quarter and by 40% to $42.4 million for the first half. Increases
were produced by both Insignia's real estate service and real estate ownership
operations, while interest expense increased reflecting the cost of acquisition
capital. A discussion of the components of the increase in Net EBITDA follows.
EBITDA from Service Businesses
Insignia's services businesses produced increases in EBITDA, before merger
related expenses, of 29% to $20.6 million for the second quarter and 42% to
$40.3 million for the first half. The increases in EBITDA resulted from
increases in revenues of 74% for the second quarter and 82% for the first half.
The September 1997 acquisition of Realty One and the February 1998 acquisition
of Richard Ellis, together with selective acquisitions of domestic commercial
real estate services firms and favorable real estate markets, contributed to the
increase in service EBITDA.
Revenue growth of 74% for the second quarter included 61% growth in
commercial service revenues and 92% in residential service revenues. The
commercial growth was derived both from acquisitions and growth in revenues from
existing offices, while the residential growth is substantially related to the
acquisition of Realty One. Realty One's business is traditionally seasonal,
although the seasonality appears to have been tempered somewhat in 1998 by the
mild winter in Northern Ohio together with nationwide strength in the home sales
sector. Home sale unit volume for the first half of 1998 is 11% above the same
period in 1997. Realty One, together with Insignia's cooperative and condominium
management business in the New York area and its operations in Italy, will be
included with the commercial real estate service businesses expected to spun off
to Insignia's shareholders.
Real Estate Ownership
Insignia's FFO from real estate ownership increased 130% for the second
quarter to $9.3 million and 64% to $16.6 million for the first half. These
increases were derived from income growth from existing properties as well as
continued acquisitions.
FFO attributable to Insignia's majority interest in Insignia Properties
Trust increased 91% to $7.0 million for the second quarter and 42% to $12.6
million for the first half. A substantial portion of the growth is attributable
to the investment by IPT of substantially all of the proceeds of a $60 million
private offering of its stock since the third quarter of 1997. However, results
from properties owned during both periods experienced strong growth. Comparable
property revenues grew by 4.8% and 4.5% for the second quarter and first half of
1998 over 1997. The growth is primarily attributable to the average increase in
rental rates year to year, increases in the average occupancy, and the
renovation and re-leasing of The Sterling in Philadelphia. Expenses declined in
1998 primarily as a result of the above normal level of maintenance expenses
reported in 1997 as management implemented plans to improve the overall
appearance of the properties coincident with the formation of IPT. These
comparable property factors accounted for FFO growth of 57% for the second
quarter and 31% for the first half.
Co-investment properties produced FFO of $1.1 million for the second
quarter and $1.9 million for the first half of 1998 compared to $.4 million and
$1.3 million for the comparable periods in 1997. This program was commenced by
the Company in late 1996 and continues to add to Insignia's real estate
ownership positions. Partnership interests acquired in the Winthrop transaction
in the fourth quarter of 1997 provided FFO of $1.2 million for the second
quarter and $2.1 million for the first half of 1998.
Financing Costs
Interest expense, including dividends on trust based preferred securities,
increased 91% to $7.9 million for the second quarter and 77% to $14.5 million
for the first half. These increases are directly attributable to amounts drawn
on Insignia's revolving credit facility to finance acquisitions, including
approximately $140 million paid in cash in connection with the Richard Ellis,
Realty One and Winthrop acquisitions. In addition, a portion of the increase in
interest expense relates to existing debt of Richard Ellis and Realty One at the
acquisition dates, which debt remains outstanding.
Other Expenses Impacting Net Income
The discussion of Net EBITDA above excludes merger related expenses,
depreciation, amortization, gain on sale of property and income taxes.
Depreciation and amortization other than real estate depreciation increased 22%
to $10.0 million for the second quarter and 31% to $20.0 million for the first
half. Most of the increase relates to cost in excess of net assets of acquired
businesses, notably Richard Ellis and Realty One. Depreciation of real estate
is, except for two properties held by consolidated partnerships, reflected
within equity earnings - limited partnership interests. The difference between
real estate FFO and equity earnings consists of depreciation and gain on sale of
property. During the second quarter of 1998, Insignia realized a gain of
approximately $4.3 million from the sale of a property by an IPT controlled
partnership. There were no significant property gains during the comparable
periods.
Minority interests reflected in the statements of income include
approximately $2.5 million per quarter in both 1997 and 1998 representing
dividends on trust based preferred securities. The remainder of the minority
interests is substantially the minority interest in IPT. The significant
increase in minority interests is therefore attributable to the IPT FFO gains
and property sale cited above.
Merger related expenses are reflected only during 1998 and consist of
professional fees and severance arrangements directly attributable to the
proposed spinoff and merger transactions. There are substantial further merger
related expenses, most of which are contingent upon the closing of the
transactions. They include transaction bonuses, retirement of certain
outstanding employee stock options, a proposed warrant distribution to holders
of trust based preferred securities, professional fees and some additional
severance arrangements. These anticipated costs are more fully described in the
joint proxy statement/prospectus that has been mailed to shareholders.
Income taxes increased both as a result of higher income and effective tax
rates. The effective tax rate has increased to 45% for 1998 primarily as a
result of the non-deductibility of certain merger related expenses and higher
effective tax rates pertaining to some of the Company's foreign source earnings.
Earnings Per Share
Earnings per share increases were less than the Net EBITDA and net income
percentage increases because of increased common shares and dilutive assumed
conversions in 1998. The increase in shares is attributable primarily to shares
issued and options assumed in the Richard Ellis and Realty One transactions.
Exercise of employee stock options and warrants and the higher average price of
the Company's common stock in 1998 also contributed to the increase in average
shares.
Liquidity and Capital Resources
The Company's liquidity and capital resources consist of its cash on hand,
cash provided by operations and amounts available under its revolving credit
facilities. Net EBITDA less income taxes is used by the Company to measure the
working capital provided from operations. Operations by this measure produced
$36.9 million for the first half of 1998, before merger related expenses. The
Company believes that its cash from operating activities is more than adequate
to meet its working capital and capital replacement needs. However, it is
important to note that periods of revenue growth in the leasing sector of
commercial property services result in some portion of working capital from
operations being used to carry greater receivables. In addition, cash from
operations is negatively impacted during the first quarters of each year as a
result of annual incentive payments and the seasonality of Realty One.
Capital expenditure requirements are not normally extensive, consisting of
periodic computer, furniture and fixture replacements. Most capital expenditures
are typically incurred in connection with acquisitions or other personnel
additions. The Company, however, will expend significantly more than normal in
1998 and into 1999. Capital expenditures in the first half of 1998 of $6.3
million consist primarily of costs incurred to purchase and implement a new
generation of computer systems for the apartment and partnership management
business. In addition to that major program, Holdings has plans to implement a
similar new generation of computer systems for the cooperative and condominium
management business, a relocation of that business within the Midtown area of
Manhattan, office relocations and expansions in Chicago and Atlanta, and new
generations of computer systems for the international commercial property
services businesses, both for the United States and the United Kingdom. Realty
One also expects to commence a program to substantially upgrade its broker
productivity and target marketing systems. The aggregate cost of these planned
upgrades is approximately $16 million.
The Company must supplement the remaining cash from operations after
capital expenditures to finance acquisitions of businesses and real estate.
Insignia Properties Trust has separate capital resources for this purpose, which
currently consist of an unused $50 million line of credit. IPT expects this
credit facility to be sufficient for its acquisition requirements for the
remainder of 1998.
Insignia has increased is revolving credit facility to $300 million, of
which $68 million was available at June 30, 1998. The Company believes this
facility, together with its cash on hand, is more than adequate for the period
through the proposed spinoff and merger transactions, including the payment of
merger related expenses. It is expected that Holdings will obtain its separate
credit facilities to finance acquisitions and co-investments following the
spinoff. While Holdings has commenced seeking a credit facility of $150 million,
it is very early in the process and no assurance can be given that Holdings can
obtain an acceptable credit facility in that amount or any amount.
Year 2000
Insignia has completed an assessment on the impact of the year 2000 issue
and has determined that it will have to modify or replace portions of its
software so that computer systems will function properly with respect to dates
in the year 2000 and thereafter. The project is estimated to be completed no
later than early 1999, which is prior to any anticipated impact on its operating
systems. The Company believes that with current ongoing changes in its computer
platform, expected to be complete later in 1998, coupled with current
modifications to existing software and software conversions, the year 2000 issue
will not pose significant operational problems for its computer systems. The
Company is currently assessing the extent to which its operations are vulnerable
should third party vendors and other organizations, with which the Company
conducts business, fail to remediate properly their computer systems. In the
event that such necessary modifications and conversions are not made, or are not
completed in a timely fashion, the year 2000 issue could potentially have a
material impact on the operations of the Company. The Company anticipates that
year 2000 compliance will cost approximately $1.9 million, of which $1.2 million
has been spent to date.
Other
Certain information contained in this quarterly report, and documents
incorporated by reference herein, 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
information includes, without limitation, statements regarding the results of
litigation, the results of the spin off and merger, the effects of year 2000
issues, the Company's future financial performance and estimated capital
expenditures. Actual results will be effected by a variety of risks and factors,
including, without limitation, national and local economic conditions, real
estate risks and financing risks. Such forward-looking statements speak only as
of the date of this quarterly report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates of revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 in Notes to Condensed Consolidated Financial Statements, Part I,
Item 1, of Form 10-Q for June 30, 1998 for the details on outstanding issues.
Also, see Registrants' Annual Report on Form 10-K for the year ended December
31, 1997.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial Data Schedule for June 30, 1998.
b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
June 30, 1998:
1. Form 8-K/A dated February 25, 1998 and filed April 1, 1998
disclosing Registrants' sales of equity securities pursuant to
Regulation S in connection with the Richard Ellis acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
INSIGNIA FINANCIAL GROUP, INC.
by: /s/Andrew L. Farkas
----------------------------------------------------------
Andrew L. Farkas
Chairman and Chief Executive Officer
by: /s/James A. Aston
----------------------------------------------------------
James A. Aston
Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. June 30, 1998 Form 10-Q and is qualified in
its entirety by reference to such 10-Q filing.
</LEGEND>
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<NAME> Insignia Financial Group, Inc.
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