<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MARCH 17, 1998
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 1-13232 84-1259577
- ------------------------------- ------------ -------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
1873 SOUTH BELLAIRE STREET, SUITE 1700, DENVER, CO 80222-4348
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 757-8101
NOT APPLICABLE
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. OTHER EVENTS
On March 17, 1998, AIMCO entered into an Agreement and Plan of
Merger (the "Insignia Merger Agreement") with Insignia Financial Group, Inc.,
a Delaware corporation ("Insignia"), pursuant to which Insignia will be
merged with and into AIMCO with AIMCO as the survivor (the "Insignia
Merger"). The Insignia Merger Agreement provides that prior to the Insignia
Merger, Insignia will spin off to its stockholders all assets related to its
U.S. and international commercial real estate business, its New York-based
cooperative and condominium management company, its single-family home
brokerage operations and other related holdings.
In the Insignia Merger the common stock, par value $0.01 per share,
of Insignia ("Insignia Common Stock") will be converted, assuming the
stockholders of AIMCO and Insignia approve the Insignia Merger, into the
right to receive an aggregate of approximately $303 million in Series E.
Preferred Stock, par value of $0.01 per share, of AIMCO ("Series E Preferred
Stock"). In addition to receiving the same dividends as holders of AIMCO
Common Stock, holders of Series E Preferred Stock are entitled to a preferred
dividend of $50 million in the aggregate, and when such dividend is paid, the
Series E Preferred Stock automatically will convert into AIMCO Common Stock
on a one-for-one basis, subject to antidilution adjustments, if any. In
addition, AIMCO will assume approximately $307 million in outstanding
indebtedness and other liabilities and will assume approximately $150 million
of 6 1/2% Trust Convertible Preferred Securities issued by Insignia Financing
I, a subsidiary of Insignia (the "TOPRs"), for a total transaction value of
approximately $810 million. Also, the Insignia Merger Agreement provides that
AIMCO is required to propose to acquire (by merger) the outstanding shares of
beneficial interest in Insignia Properties Trust, a Maryland real estate
investment trust ("IPT"), at a price of at least $13.25 per IPT share and use
its reasonably best efforts to consummate the transaction after the closing
of the Insignia Merger but not earlier than August 15, 1998. IPT is a 75%
owned subsidiary of Insignia; the 25% of the shares of IPT not owned by
Insignia are valued at an aggregate of approximately $100 million, or
approximately $13.25 per share.
If the stockholders of AIMCO do not approve the Insignia
Merger, the Insignia Merger may nonetheless be consummated. However,
instead of receiving $303 million in Series E Preferred Stock, holders
of Insignia Common Stock would receive approximately $203 million in
Series E Preferred Stock and $100 million in Series F Preferred Stock,
par value $0.01 per share, of AIMCO ("Series F Preferred Stock"). In
either case, holders of Series E Preferred Stock would be entitled to a
preferred dividend of $50 million. Holders of Series F Preferred Stock
are entitled to receive the greater of (i) dividends received by holders
of AIMCO Common Stock and (ii) preferred distributions of 10% of the
face value of the Series F Preferred Stock, with the preferred return
rate escalating by 1% each year until a 15% annual return is achieved.
Upon the approval by stockholders of AIMCO, the Series F Preferred Stock
will convert into AIMCO Common Stock on a one-to-one basis, subject to
antidilution adjustments, if any.
Insignia Financial Group, Inc. is a leading fully integrated
real estate services company. Insignia is the largest manager of
multifamily residential properties in the United States and is among the
largest managers of commercial properties. Insignia commenced operations
in December 1990 and since then has grown to provide property and/or
asset management and other real estate services for over 2,700
properties which include approximately 280,000 residential units
(including cooperative and condominium units), and approximately 160
million square feet and commercial space located in over 500 cities and
48 states and overseas.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Consolidated Financial Statements and Report of Independent
Auditors for Ambassador Apartments, Inc., as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997
(included as Exhibit 99.1 to this Report and incorporated herein by this
reference).
2
<PAGE>
Consolidated Financial Statements and Report of Independent
Auditors for Insignia Financial Group, Inc., as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
(included as Exhibit 99.2 to this Report and incorporated herein by this
reference).
(b) Pro Forma Financial Information
The required pro forma financial information is included as Exhibit
99.3 to this Report and incorporated herein by this reference.
(c) Exhibits
The following exhibits are filed with this report:
Exhibit
Number Description
- ------- -----------
23.1 Consent of Ernst & Young LLP, Chicago, Illinois.
23.2 Consent of Ernst & Young LLP, Greenville, South Carolina.
3
<PAGE>
99.1 Consolidated Financial Statements and Report of Independent
Auditors for Ambassador Apartments, Inc., as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31,
1997.
99.2 Consolidated Financial Statements and Report of Independent Auditors
for Insignia Financial Group, Inc., as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31,
1997.
99.3 Pro Forma Financial Information of Apartment Investment and Management
Company as of and for the year ended December 31, 1997.
* * * * *
4
<PAGE>
SIGNATURE
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 thereunto duly authorized.
APARTMENT INVESTMENT AND
MANAGEMENT COMPANY
Date: March 31, 1998 By:
------------------------------------
Troy D. Butts
Senior Vice President and Chief
Financial Officer
5
<PAGE>
EXHIBIT INDEX TO CURRENT REPORT ON FORM 8-K
Exhibit
Number Description
- ------- -----------
23.1 Consent of Ernst & Young LLP, Chicago, Illinois.
23.2 Consent of Ernst & Young LLP, Greenville, South Carolina.
99.1 Consolidated Financial Statements and Report of Independent Auditors
for Ambassador Apartments, Inc., as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997.
99.2 Consolidated Financial Statements and Report of Independent Auditors
for Insignia Financial Group, Inc., as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31,
1997.
99.3 Pro Forma Financial Information of Apartment Investment and Management
Company as of and for the year ended December 31, 1997.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Current Report on Form 8-K, dated March
17, 1998, filed with the Securities and Exchange Commission by Apartment
Investment and Management Company (AIMCO), of our report dated January 30,
1998 (except for Note 19, as to which the date is March 5, 1998), with
respect to the consolidated financial statements and schedule of Ambassador
Apartments, Inc. as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997. We further consent to the
incorporation by reference of such report in AIMCO's Registration Statements
on Form S-3 (No. 333-26415, No. 333-828, No. 333-4542, No. 333-4546, No.
333-8997, No. 333-17431, No. 333-20755, No. 333-36531, and No. 333-36537) and
AIMCO's Registration Statements on Form S-8 (No. 333-4550, No. 333-4548, No.
333-14481, No. 333-36803, and No. 333-41719), all filed with the Securities
and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 30, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use 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. incorporated by
reference in Apartment Investment and Management Company's Current Report on
Form 8-K dated March 17, 1998, and to the incorporation by reference in
Apartment Investment and Management Company's Registration Statement on Form
S-3 (No. 333-828), Registration Statement on Form S-3 (No. 333-4546),
Registration Statement on Form S-3 (No. 333-8997), Registration Statement on
Form S-3 (No. 333-17431) Registration Statement on Form S-3 (No. 333-20755),
Registration Statement on Form S-3 (No. 333-26415), Registration Statement on
Form S-3 (No. 333-36531), Registration Statement on Form S-3 (No. 333-36537),
Registration Statement on Form S-3 (No. 333-4542), Registration on Form S-8
(No. 333-4550), Registration Statement on Form S-8 (No. 333-4548),
Registration Statement on Form S-8 (No. 333-14481), Registration Statement on
Form S-8 (No. 333-36803), Registration Statement on Form S-8 (No. 333-41719).
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
March 31, 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Ambassador Apartments, Inc.
We have audited the accompanying consolidated balance sheets of Ambassador
Apartments, Inc. (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ambassador Apartments, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
January 30, 1998
except for Note 19, as to which the date
is March 5, 1998
<PAGE>
AMBASSADOR APARTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars In Thousands, Except For Per Share Amounts)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Rental property:
Land. . . . . . . . . . . . . . . . . . . . . $88,610 $82,124
Buildings and improvements. . . . . . . . . . 456,071 407,002
Furniture and equipment . . . . . . . . . . . 7,073 6,166
-------- --------
551,754 495,292
Accumulated depreciation . . . . . . . . . . . . . (52,319) (33,340)
-------- --------
499,435 461,952
Cash and cash equivalents. . . . . . . . . . . . . 4,448 4,002
Escrow deposits - restricted . . . . . . . . . . . 30,588 30,897
Escrowed bond funds - restricted . . . . . . . . . 250 549
Note receivable - officer. . . . . . . . . . . . . -- 1,000
Accounts receivable. . . . . . . . . . . . . . . . 1,586 1,870
Investment in and advances to unconsolidated
real estate limited partnership . . . . . . . . 1,243 4,549
Deferred financing costs, net. . . . . . . . . . . 15,404 9,640
Other. . . . . . . . . . . . . . . . . . . . . . . 4,222 1,325
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $557,176 $515,784
-------- --------
-------- --------
LIABILITIES AND EQUITY
Bonds payable. . . . . . . . . . . . . . . . . . . $313,097 $279,355
Notes payable. . . . . . . . . . . . . . . . . . . 74,552 79,974
Accrued interest . . . . . . . . . . . . . . . . . 554 913
Real estate taxes payable. . . . . . . . . . . . . 2,348 3,837
Tenant security deposits . . . . . . . . . . . . . 2,480 2,231
Accounts payable and other liabilities . . . . . . 2,827 2,138
Distributions/dividends payable. . . . . . . . . . 867 750
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . 396,725 369,198
-------- --------
Minority interest. . . . . . . . . . . . . . . . . 28,271 32,006
Preferred Stock, $.01 par value; 20,000,000 shares
authorized, 1,351,351 shares of Class A Senior
Cumulative Convertible Preferred Stock issued
and outstanding . . . . . . . . . . . . . . . . 24,132 24,132
Stockholders' equity:
Common Stock, $.01 par value; 100,000,000
shares authorized, 10,552,180 and 8,958,525
shares issued and outstanding at December 31,
1997 and 1996, respectively . . . . . . . . . 106 90
Additional paid-in capital 147,414 112,975
Dividends in excess of accumulated earnings . . (39,472) (22,617)
-------- --------
Total stockholders' equity . . . . . . . . . . . . 108,048 90,448
-------- --------
Total liabilities and equity . . . . . . . . . . . $557,176 $515,784
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AMBASSADOR APARTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . $86,183 $64,842 $49,966
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,146 5,352 3,415
------------ ------------ ------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . 93,329 70,194 53,381
Expenses:
Property operating . . . . . . . . . . . . . . . . . . . . 23,241 16,853 13,477
Real estate taxes. . . . . . . . . . . . . . . . . . . . . 8,016 6,327 5,255
General and administrative . . . . . . . . . . . . . . . . 6,868 5,225 3,612
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 18,979 13,430 8,894
Advertising and marketing. . . . . . . . . . . . . . . . . 1,701 1,329 1,088
Repairs and maintenance. . . . . . . . . . . . . . . . . . 2,914 2,522 1,754
Financing fees . . . . . . . . . . . . . . . . . . . . . . 3,025 3,272 1,466
Bad debt . . . . . . . . . . . . . . . . . . . . . . . . . 216 434 584
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 22,569 14,145 8,903
Amortization of deferred financing fees. . . . . . . . . . 1,393 1,829 2,792
(Income) losses from investment in unconsolidated real
estate limited partnerships . . . . . . . . . . . . . (405) (233) 320
Merger related costs . . . . . . . . . . . . . . . . . . . 524 -- --
------------ ------------ ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 89,041 65,133 48,145
------------ ------------ ------------
Income before minority interest, gain on sale of rental
property, loss on sale of investment, loss on sale
of interest rate cap, and extraordinary item. . . . . 4,288 5,061 5,236
Income allocated to minority interest. . . . . . . . . . . (1,237) 1,883 615
------------ ------------ ------------
Income before gain on sale of rental property, loss on
sale of investment, loss on sale of interest rate
cap and extraordinary item . . . . . . . . . . . . . 3,051 3,178 4,621
Gain on sale of rental property, net of minority
interest. . . . . . . . . . . . . . . . . . . . . . . -- -- 966
------------ ------------ ------------
Income before loss on sale of investment, loss on sale of
interest rate cap and extraordinary item. . . . . . . 3,051 3,178 5,587
Loss on sale of investment, net of minority interest . . . (509) -- --
------------ ------------ ------------
Income before loss on sale of interest rate cap and
extraordinary item. . . . . . . . . . . . . . . . . . 2,542 3,178 5,587
Loss on sale of interest rate cap, net of minority
interest. . . . . . . . . . . . . . . . . . . . . . . -- 2,084 --
------------ ------------ ------------
Income before extraordinary item . . . . . . . . . . . . . 2,542 1,094 5,587
Extraordinary item, net of minority interest . . . . . . . (1,384) (4,653) 4,360
------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . 1,158 (3,559) 9,947
Income allocated to preferred stockholders . . . . . . . . 2,296 851 --
------------ ------------ ------------
Net (loss) income applicable to common stockholders. . . . $(1,138) $(4,410) $ 9,947
------------ ------------ ------------
------------ ------------ ------------
BASIC EARNINGS PER SHARE OF
COMMON STOCK:
(Loss) income per weighted average share
of common stock outstanding:
Before extraordinary item. . . . . . . . . . . . . . . . . $ 0.02 $ 0.03 $ 0.62
Extraordinary item . . . . . . . . . . . . . . . . . . . . (0.14) (0.52) 0.49
------------ ------------ ------------
Net (loss) income. . . . . . . . . . . . . . . . . . . . . $ (0.12) $ (0.49) $ 1.11
------------ ------------ ------------
------------ ------------ ------------
DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
(Loss) income per weighted average share
of common stock outstanding:
Before extraordinary item. . . . . . . . . . . . . . . . . $ 0.03 $ 0.03 $ 0.62
Extraordinary item . . . . . . . . . . . . . . . . . . . . (0.14) (0.52) 0.49
------------ ------------ ------------
Net (loss) income. . . . . . . . . . . . . . . . . . . . . $ (0.11) $ (0.49) $ 1.11
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AMBASSADOR APARTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year . . . . . . . . . . . . . . $ 90 $ 90 $ 90
Net proceeds from common stock offering . . . . . 13 -- --
Proceeds from exercise of stock options . . . . . 2 -- --
Conversion of common units to common stock
by minority interest. . . . . . . . . . . . 1 -- --
--------- --------- ---------
Balance, end of year . . . . . . . . . . . . . . . . . $ 106 $ 90 $ 90
--------- --------- ---------
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $ 112,975 $ 112,957 $ 112,943
Net proceeds from common stock offering. . . . . . 28,833 -- --
Proceeds from exercise of stock options. . . . . . 3,193 -- --
Conversion of common units to common stock
by minority interest . . . . . . . . . . . . 1,090 -- --
Principal payments on notes receivable for
issuance of common units. . . . . . . . . . . 1,323 18 14
--------- --------- ---------
Balance, end of year. . . . . . . . . . . . . . . . . . $ 147,414 $ 112,975 $ 112,957
--------- --------- ---------
--------- --------- ---------
DIVIDENDS IN EXCESS OF
ACCUMULATED EARNINGS
Balance, beginning of year. . . . . . . . . . . . . . . $ (22,617) $ (3,874) $ (3,071)
Net (loss) income applicable to common
stockholders. . . . . . . . . . . . . . . . . (1,138) (4,410) 9,947
Dividends to common stockholders . . . . . . . . . (15,717) (14,333) (10,750)
--------- --------- ---------
Balance, end of year. . . . . . . . . . . . . . . . . . $ (39,472) $ (22,617) $ (3,874)
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AMBASSADOR APARTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 1,158 $ (3,559) $ 9,947
Adjustments to reconcile net income(loss) to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 18,979 13,430 8,894
Bad debt expense . . . . . . . . . . . . . . . . . 216 434 584
Amortization of deferred financing fees. . . . . . 1,393 1,829 2,792
(Income) losses from investment in unconsolidated
real estate limited partnerships. . . . . . . (405) (233) 320
Income allocated to minority interest. . . . . . . 1,237 1,883 615
Gain on sale of rental property, net of minority
interest. . . . . . . . . . . . . . . . . . . -- -- (966)
Loss on sale of investment, net of minority
interest. . . . . . . . . . . . . . . . . . . 509 -- --
Loss on sale of interest rate cap, net of minority
interest. . . . . . . . . . . . . . . . . . . -- 2,084 --
Extraordinary item, net of minority interest . . . 1,384 4,653 (4,360)
Write-off of deferred letter of credit fees . . . -- -- 1,374
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . 68 (1,074) (448)
Other assets. . . . . . . . . . . . . . . . . (2,897) (706) (182)
Accrued interest. . . . . . . . . . . . . . . (359) 913 (92)
Real estate taxes payable . . . . . . . . . . (1,489) (1,161) 1,925
Tenant security deposits. . . . . . . . . . . 249 599 526
Accounts payable and other liabilities. . . . 689 5 663
------------ ------------ -----------
Net cash provided by operating activities . . . . . . . 20,732 19,087 21,592
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchase of rental property . . . . . . . . . . . . . . (24,179) (59,951) (55,565)
Improvements to rental property . . . . . . . . . . . . (19,033) (16,189) (12,227)
Advances to unconsolidated real estate limited
partnerships . . . . . . . . . . . . . . . . . . . -- (39,883) --
Repayment from unconsolidated real estate limited
partnerships . . . . . . . . . . . . . . . . . . . 3,183 36,048 --
Repayment of note receivable - officer. . . . . . . . . 1,000 -- --
Net proceeds from sale of rental property . . . . . . . -- -- 7,650
Contribution to unconsolidated real estate limited
partnerships . . . . . . . . . . . . . . . . . . . -- -- (28)
Distribution from unconsolidated real estate limited
partnerships. . . . . . . . . . . . . . . . . . . -- -- 1,640
------------ ------------ -----------
Net cash used in investing activities . . . . . . . . . 39,029 79,975 58,530
------------ ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from common stock offering . . . . . . . . . $ 28,846 $ -- $ --
Capital contributions from Investor I and II. . . . . . . -- 23,000 --
Net proceeds from preferred stock offering. . . . . . . . -- 24,132 --
Decrease (increase) in escrow deposits. . . . . . . . . . 309 (17,952) (12,945)
Decrease in escrowed bond funds-restricted. . . . . . . . 299 2,230 1,035
Financing fees. . . . . . . . . . . . . . . . . . . . . . (8,147) (9,762) (5,587)
Proceeds from sale of interest rate cap . . . . . . . . . -- 1,485 --
Proceeds from bonds payable . . . . . . . . . . . . . . . 68,805 34,305 42,015
Payment to sinking fund . . . . . . . . . . . . . . . . . -- -- (550)
Purchase of bonds payable . . . . . . . . . . . . . . . . -- (12,217) (15,053)
Repayment of bonds payable. . . . . . . . . . . . . . . . (48,313) -- --
Proceeds from notes payable . . . . . . . . . . . . . . . 87,941 145,721 102,362
Repayment of notes payable. . . . . . . . . . . . . . . . (93,363) (113,744) (55,631)
Premium paid on redemption of bonds . . . . . . . . . . . (556)
Proceeds from exercise of stock options . . . . . . . . . 3,195 -- --
Principal payments on notes receivable for issuance
of common units. . . . . . . . . . . . . . . . . . . 1,323 18 14
Proceeds from sale of common units. . . . . . . . . . . . 100 -- --
Dividends paid to common stockholders . . . . . . . . . . (15,717) (14,333) (14,333)
Dividends paid to preferred stockholders. . . . . . . . . (2,279) (284) --
Distributions paid to minority interest . . . . . . . . . 3,700 2,979 1,543
-------- -------- --------
Net cash provided by financing activities . . . . . . . . 18,743 59,620 39,784
-------- -------- --------
Net increase (decrease) in cash . . . . . . . . . . . . . . . 446 (1,268) 2,846
Cash and cash equivalents at beginning of year . . . . . . . . 4,002 5,270 2,424
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 4,448 $ 4,002 $ 5,270
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Ambassador Apartments, Inc. ("Ambassador") was organized in Maryland on
April 15, 1994, and completed an initial public offering (the "Offering") on
August 31, 1994. Ambassador expects to continue to make an election to
qualify as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986 ("the Code"), as amended, for Federal income tax purposes.
Ambassador is the sole general partner of Ambassador Apartments, L.P., a
Delaware limited partnership (the "Operating Partnership") and owns
10,552,180 common units of partnership interest ("Common Units") and
1,351,351 preferred units of partnership interest (the "Class A Preferred
Units") as of December 31, 1997. These units represent 92.2% and 100% of
outstanding Common Units and Class A Preferred Units, respectively, as of
December 31, 1997. Dividends declared or paid to holders of Ambassador's
common stock ("Common Stock") and its Class A Senior Cumulative Preferred
Stock ("Class A Preferred Stock") are based upon such distributions received
by Ambassador with respect to its Common Units and Class A Preferred Units.
Unless the context requires otherwise, all references to the Company
herein mean Ambassador Apartments, Inc. and those entities owned or
controlled by Ambassador Apartments, Inc., including the Operating
Partnership. The Company accounts for three joint ventures using the equity
method of accounting. The Company has a 50% ownership interest in
Williamsburg Limited Partnership ("Williamsburg"), a 50% ownership interest
in Brook Run Associates, and a 49.6% interest in G.P. Municipal Holdings,
L.L.C. ("G.P. Holdings") (see Note 4). Total assets, liabilities and net
income for G.P. Holdings as of and for the year ended December 31, 1997 is
$658,100, $643,620 and $-0-, respectively. The joint venture partners of
Williamsburg and G.P. Holdings are affiliated entities of the Company.
The Company is a self-administered and self-managed REIT engaged in the
ownership and management of residential rental properties leased primarily to
middle-income tenants. As of December 31, 1997, the Company owns interests
in 52 apartment communities with a total of 15,728 units located in Arizona,
Colorado, Florida, Georgia, Illinois, Tennessee, and Texas. The Company's
principal markets with more than 1,000 units each include Phoenix and
Tucson, Arizona; Tampa, Florida; Atlanta, Georgia; and Austin, Houston, and
San Antonio, Texas.
At December 31, 1997, the interests of the Company are represented by
two types of partnerships (collectively, the "Company Partnerships"): 1)
partnerships in which the Company owns certain properties (the "Property
Partnerships"), and, 2) real estate limited partnerships in which the Company
owns a joint venture interest (the "Joint Venture Partnerships"). The
following tables set forth the Company Partnerships and their corresponding
operating properties.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PROPERTY PARTNERSHIPS OPERATING PROPERTIES
- ----------------------------------- ---------------------------------------------------------
<S> <C> <C> <C>
Ambassador I, L.P............... Privado Park Quail Ridge Windridge
Shadow Creek Tierra Bonita Bent Oaks
Vista Ventana The Stratford Mountain View
Ambassador II, L.P.............. LaJolla de Tucson Heather Ridge Pine Shadows
Legend Oaks Cedar Creek Hidden Lake
Ambassador III, L. P............ Sun Lake
Ambassador IV, L.P.............. Falls of Bells Ferry
Ambassador VI, L.P.............. Cypress Ridge Madera Point
Broadmoor Stonybrook
Ambassador VII, L.P............. Coral Cove Summit Creek
Tatum Gardens Westway Village
Ambassador VIII, L.P............ Eagle's Nest Harbor Cove The Mills
Cape Cod Prime Crest Shallow Creek
LaJolla Royal Crest Franklin Oaks
Mesa Ridge Aspen Hills Crossings of Bellevue
Braesview Brookdale Lakes Park Colony
Sandalwood Trails of Ashford Crossroads
Ambassador X, L.P............... Palencia
Ambassador XI, L.P.............. Courtney Park Country Club West
Ambassador/CRM Florida Partners
Limited Partnership........ Arbors Village Crossing
Ocean Oaks Haverhill Commons
JOINT VENTURE PARTNERSHIPS
- -----------------------------------
Williamsburg Limited Partnership Williamsburg
Brook Run Associates............ Brook Run
G.P. Municipal Holdings, LLC.... N/A
</TABLE>
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Ambassador, the Operating Partnership and all entities in which Ambassador
has majority interest or control. The effects of all significant
intercompany balances and transactions have been eliminated in the
consolidated presentation.
Investments in Joint Venture Partnerships which the Company does not
have a majority interest in, or control of, are accounted for on the equity
method, except that any gains or losses of Williamsburg resulting from
financing transactions are allocated to the Company, the managing general
partner of Williamsburg. To the extent the Company's investment basis
differs from its share of the capital of an unconsolidated Joint Venture
Partnership, such difference is amortized over the depreciable life (20
years) of the unconsolidated Joint Venture Partnership's investment assets.
(b) REVENUE RECOGNITION
Rental revenue is recognized as income in the period earned.
(c) RENOVATION COSTS
All property renovation costs, including construction, architectural
design and other similar renovation costs incurred during the renovation
period, are capitalized to rental property.
(d) CASH EQUIVALENTS
All highly liquid investments, with a maturity of three months or less
when purchased, are considered to be cash equivalents.
(e) RENTAL PROPERTY
Rental property is carried at cost. The Company evaluates its rental
properties periodically for indicators of impairment, including recurring
operating losses and other significant adverse changes in the business
climate that affect the recovery of the recorded asset value. If rental
property is considered impaired, a loss is provided to reduce the net
carrying value of the asset to its estimated fair value. No impairment
losses are included in the accompanying financial statements.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Building......................... 30-40
Building improvements............ 5-30
Furniture and equipment.......... 3-12
</TABLE>
Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred. Significant renovations and improvements which
improve and/or extend the useful life of the asset are capitalized and
depreciated over their estimated useful life. In addition, initial
"turnover" costs such as electrical, plumbing, and painting generally
incurred during the renovation, re-tenanting, and stabilization period
subsequent to an acquisition, which are necessary to restore apartments units
to their intended use, are capitalized and depreciated over their estimated
useful lives.
Leasing costs, such as commissions, locator fees, and other costs
incurred in connection with renting the Company's apartment units, are
amortized on a straight-line basis over a period of nine months. The
amortization period is consistent with the weighted average life of the
associated lease agreements.
(f) INCOME TAXES
The Company expects to continue to make an election to qualify as a
REIT. Under the applicable provisions of the Internal Revenue Code of 1986,
as amended, a REIT will generally not be subject to Federal income tax so
long as it distributes at least 95% of its REIT taxable income to its
shareholders and complies with certain other requirements. Even if the
Company qualifies as a non-taxable entity for Federal income tax purposes,
the Company may be subject to certain state or local taxes on its income and
property depending on the tax laws of particular states.
As of December 31, 1997 the bases of the Company's net assets reported
in the Company's consolidated financial statements exceeded the tax bases by
approximately $13.2 million.
(g) DEFERRED FINANCING COSTS
Deferred financing costs include costs incurred to obtain long-term
financing and interest rate protection agreements. The deferred financing
costs are being amortized over the terms of their respective agreements on a
straight-line basis. During 1997, unamortized deferred financing costs of
approximately $990,000 were written off due to refinancing the secured
revolving line of credit (see Note 16).
During 1996, unamortized deferred financing costs of approximately $9.8
million were fully amortized due to the sale of the interest rate cap, early
repayment of bridge financing, and reissuance of certain bonds in connection
with replacement of credit enhancement.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, unamortized deferred financing costs were written off upon
the Company's acquisition of its fixed rate bonds, termination of standby
purchase agreements with a financial institution, and the Company's sale of
the Laurelwood property. The total unamortized financing costs written off
due to the transactions mentioned above was approximately $2.0 million.
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Deferred financing costs $33,705 $25,558 $15,796
Accumulated amortization 18,301 15,918 4,266
--------- -------- --------
$15,404 $ 9,640 $11,530
--------- -------- --------
--------- -------- --------
</TABLE>
(h) EARNINGS PER SHARE OF COMMON STOCK
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share". Statement No. 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 to conform to the Statement No. 128
requirements.
(i) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate swap transactions to modify
the interest characteristics with respect to certain of its variable rate
bonds (see Note 4). The agreements involve the exchange of amounts based on
a fixed interest rate for amounts based on variable rates over the life of
the agreement without an exchange for the notional amount upon which the
payments are based. The differential to be paid or received as interest rates
change is accrued and recognized as an adjustment of interest expense during
the period to which the payment or receipt relates. The related amount
payable to or receivable from the counterparty is included in accrued
interest or accounts receivable. The fair value of any swap agreement that
qualifies as a hedge is not recognized in the financial statements. The gain
or loss on termination of an interest rate swap agreement is deferred and
amortized as an adjustment to interest expense related to the debt over the
remaining term of the original contractual life of the terminated swap
agreement. In the event of the early extinguishment of the related debt, any
realized or unrealized gain or loss from the swap is recognized in income
coincident with the extinguishment. Swap agreements or specific notional
components thereof that do not qualify as a hedge of the Company's interest
rate risk are recorded at fair value.
The Company purchased interest rate protection (interest rate caps) to
hedge its exposure to increases in interest costs for certain other of its
variable rate bonds (see Note 4). The premium paid for the Company's
interest rate protection is included in deferred financing costs and is
amortized ratably over the term of the related interest rate protection
agreement. Payments received as a result of the specified interest rate
index exceeding the strike price are accrued in accounts receivable and
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are recognized as a reduction of interest expense (the accrual accounting
method). Upon any termination of the interest rate protection agreement, any
gain or loss is recognized in income coincident with the termination.
The Company is exposed to credit loss in the event of non-performance by
counterparties on the interest swap agreements, but the Company does not
expect non-performance by any of these counterparties. The amount of such
exposure is generally limited to the amount of any payments due but not yet
received from the counterparty.
(j) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(k) STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement defines a fair value based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the fair value based method, compensation cost is measured
at the grant date based on the estimated fair value of the award and is
recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
The Company has elected to continue to account for its employee stock
compensation plans under APB Opinion No. 25 and has recognized no
compensation expense in the statements of operations relating to grants
awarded under its stock compensation plans. Unaudited pro forma disclosures
of net earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied, are presented in Note 8.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MINORITY INTEREST
Certain affiliated entities and senior executives of the Company (the
"Limited Partners") hold 895,318 Common Units as limited partners of the
Operating Partnership as of December 31, 1997. The Operating Partnership
made loans to certain senior executives of the Company to acquire Common
Units, which are pledged as collateral for the loans. The partners' equity
of the Operating Partnership is reduced by the outstanding balance of these
loans. However, the minority interest percentage in the Operating
Partnership includes such Common Units because these executives will receive
all of the benefits of a Common Unit holder.
Terms of the loans are as follows:
<TABLE>
<CAPTION>
MATURITY BALANCE AT COMMON UNIT
ORIGINAL DATE OF DATE OF DECEMBER 31, ACQUIRED AND
AMOUNT LOAN LOAN 1997 PLEDGED
---------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Loan A (i) $1,350,000 8/31/94 8/31/04 $ -- 84,375
Loan B (i) 250,000 8/31/94 8/19/98 240,000 15,625
Loan C (ii) 700,000 4/7/97 6/30/00 700,000 32,990
</TABLE>
(i) Loan bears interest at the prime rate (8.50% at December 31,
1997) plus 0.50% per annum. Requires quarterly principal and
interest payments.
(ii) Loan bears interest at 6.38% per annum. Requires quarterly
interest-only payments.
The Common Units held by Limited Partners have the same characteristics
as shares of Common Stock in as much as they share proportionately in any
distributions of the Operating Partnership. The minority interest ownership
percentage is calculated by dividing the number of Common Units held by
Limited Partners divided by the total number of outstanding Common Units.
On March 27, 1996, the Company, through its affiliates, formed two new
limited partnerships, Jupiter-I, L.P. and Jupiter-II, L.P., which hold 99%
limited partnership interests in Ambassador I, L.P. and Ambassador VII, L.P.,
respectively. The Company, through its affiliates, holds a 1% general
partnership interest in both Ambassador I, L.P. and Ambassador VII, L.P. and
a 49.6% general partnership interest in both Jupiter-I, L.P. and Jupiter-II,
L.P.
In return for a capital contribution of $17.8 million, a Japanese
corporation ("Investor I") received a 50.4% limited partnership interest in
Jupiter-I, L.P. In return for a capital contribution of $5.2 million, a
Japanese individual ("Investor II") received a 50.4% limited partnership
interest in Jupiter-II, L.P. The Company used the proceeds to pay
approximately $1.4 million of placement fees and formation costs for
Jupiter-I, L.P. and Jupiter-II, L.P. and approximately $21.6 million to repay
principal outstanding on the Company's secured revolving line of credit. The
Company treats as minority interest any profits and losses allocated to
Investor I and Investor II in accordance with the respective partnership
agreements of Jupiter-I, L.P. and Jupiter-II, L.P.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The partnership agreements of Jupiter-I, L.P. and Jupiter-II, L.P.
provide that profits and losses will generally be distributed to the partners
as follows. All depreciation of the applicable properties are to be
allocated to the partners in proportion to their respective ownership
percentages. All other profit and loss (excluding depreciation) from the
applicable properties are to be allocated to the partners in proportion to
the amount of cash distributed to each partner during the year.
To the extent available, the following cash distributions will be made
from Ambassador I, L.P. to the partners of Jupiter-I, L.P. First, Investor I
receives an 8.5% per annum cumulative priority return on its original
investment, paid monthly in arrears. Second, the Company receives an 8.5%
per annum cumulative priority return on its capital contribution (as defined)
into Jupiter-I, L.P., paid monthly in arrears. Third, the Company receives
excess cash flow up to a specified amount (as defined), paid quarterly in
arrears. Fourth, any remaining excess cash flow from Ambassador I, L.P. is
paid quarterly in arrears, 30% to Investor I and 70% to the Company.
To the extent available, the following cash distributions will be made
from Ambassador VII, L.P. to the partners of Jupiter-II, L.P. First,
Investor II receives an 8.5% per annum cumulative priority return on its
original investment, paid monthly in arrears. Second, the Company receives
an 8.5% per annum cumulative priority return on its capital contribution (as
defined) into Jupiter-II, L.P., paid monthly in arrears. Third, the Company
receives excess cash flow up to a specified amount (as defined), paid
quarterly in arrears. Fourth, any remaining excess cash flow from Ambassador
VII, L.P. is paid quarterly in arrears, 30% to Investor II and 70% to the
Company.
At any time following the fifth, but automatically upon the seventh,
anniversary of the formation of Jupiter-I, L.P. and Jupiter-II, L.P.,
Investor I and Investor II are each entitled to a redemption of their
partnership interests in the form of cash and/or Common Stock in the Company.
The election of the form of the redemptions (cash or stock) is at the sole
and absolute discretion of the Company. The Company has reserved 1,195,233
shares of Common Stock for issuance upon conversion of the limited
partnership interests by Investor I and Investor II.
3. MERGER
On December 23, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Apartment Investment and Management Company
("AIMCO"), an owner and manager of multifamily apartment properties, based in
Denver, Colorado. Pursuant to the Merger Agreement, the Company will be merged
with and into AIMCO (the "Merger"), with AIMCO as the surviving corporation.
Upon consummation of the Merger, each outstanding share of the Company's Common
Stock other than Common Stock held by the Company or AIMCO, will be converted
into the right to receive that number of shares of AIMCO's common stock ("AIMCO
Common Stock") equal to the quotient (rounded to the nearest 1/1000) (the
"Conversion Ratio") determined by dividing $21.00 by the AIMCO Index Price. The
term "AIMCO Index Price" means the aggregate of the average of the high and low
sales prices of AIMCO Common Stock, as reported on the New York Stock Exchange
("NYSE"), on each of the twenty consecutive NYSE trading days
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ending on the fifth NYSE trading day immediately preceding the effective time
of the merger ("Effective Time"), divided by 20. Notwithstanding the
foregoing, if the Conversion Ratio calculated pursuant to the foregoing is
greater than 0.583, then, at AIMCO's option, the Conversion Ratio to be used
shall be either the Conversion Ratio as calculated pursuant to the foregoing
or 0.583 (so long as the Merger would continue to qualify as a reorganization
under Section 368(a) of the Code). If AIMCO opts for the Conversion Ratio to
equal 0.583, then, in addition to 0.583 shares of AIMCO Common Stock, AIMCO
will pay to each holder of Common Stock for each share of Common Stock held
by such shareholder an amount in cash equal to (i) $21.00 minus (ii) the
product of the AIMCO Index Price and 0.583. In lieu of any fractional shares
of AIMCO Common Stock, each holder of Common Stock who would otherwise be
entitled to receive such fractional shares will be paid cash equal to the
product of such fractional shares and the AIMCO Index Price. The Merger is
subject to a number of conditions, including the approval by the stockholders
of the Company. Costs related to the Merger are expensed as incurred and
approximated $524,000 for the year ended December 31, 1997.
In the Merger Agreement, AIMCO and the Company agreed that the parties
will use their reasonable best efforts to effect a business combination (the
"OP Reorganization") of the Operating Partnership with AIMCO Properties,
L.P., a Delaware limited partnership ("AIMCO Operating Partnership")
immediately following the Effective Time, with the AIMCO Operating
Partnership as the surviving entity, which business combination will have, to
the extent possible, for the holders of units representing interests in the
Operating Partnership ("Common Units"), the same economic and tax
consequences for the holders of Common Units as the Merger has for holders of
Common Stock. If a business combination is not effected due to the failure
to obtain consents of all persons entitled to give or withhold such consents
which are necessary for such business combination, then (i) the partnerships
shall remain and be operated to separate entities and (ii) AIMCO will execute
and deliver to each limited partner in the Operating Partnership the
agreement contemplated by a certain Exchange Rights Agreement of the Company
and be bound thereby, relating to the exchange rights of holders of Common
Units.
The Merger Agreement also provides that at or prior to the Effective
Time, the Company will call for redemption the limited partnership interests
not owned by the Company or its affiliates in Jupiter-I, L.P. and Jupiter-II,
L.P. (the "Jupiter Redemption") in accordance with their respective
partnership agreements and subject to and simultaneously with the Effective
Time, AIMCO will provide the funds for, and cause payment to be made in
respect of, the redemption thereof upon the Effective Time.
The Merger Agreement provides that prior to the Effective Time, the Board
of Directors of the Company (the "Board") will call for the redemption of all
outstanding shares of the Preferred Stock of the Company in accordance with, and
at a redemption price equal to the amount set forth in Section 8(a) of the
Articles Supplementary of the Company with respect thereto, to be effective
simultaneously with, and to be conditioned upon, the occurrence of, the
Effective Time. Notwithstanding the foregoing, the parties convert such stock
into Common Stock in the manner set
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
forth in such Articles Supplementary. To the extent any Preferred Stock
shall not have been converted as of the Effective Time, AIMCO will provide
the funds for, and cause payment to be made in respect of, the redemption
thereof on the date of the Effective Time.
In addition to its regular quarterly dividends, the Company expects to
declare a special dividend with a record date prior to the Effective Time
which will result in its stockholders receiving an amount per share equal to
the product of (x) the difference between (a) the Company's most recent
quarterly dividend amount (appropriately adjusted by any stock splits and the
like) and (b) the product of the Conversion Ratio (as determined pursuant to
the Merger Agreement) and AIMCO's most recent quarterly dividend amount
(appropriately adjusted for any stock splits and the like) and (y) the number
of days which shall have elapsed through and including the day immediately
prior to the day of the Effective Time since the end of the most recent
calendar quarter (as of the Effective Time) for which the Company's dividend
record date has occurred, divided by 91. Concurrent and equivalent per unit
distributions for the benefit of holder Common Units shall be made in
connection with the special dividend.
Pursuant to the Merger Agreement, immediately prior to the Effective
Time, each outstanding stock option issued by the Company ("Stock Options")
will become fully vested and exercisable. Pursuant to the Merger Agreement,
holders of Stock Options may elect prior to the Effective Time to have the
Stock Options with respect to which such election is made canceled, and, in
consideration for such cancellation, each such electing holder shall receive
on the day of the Effective Time for each share subject to the Stock Options
for which such election is made, an amount (subject to any applicable
withholding tax) in cash equal to the excess, if any, of $21.00 over the per
share exercise price of such Stock Option. Pursuant to the Merger Agreement,
as of the Effective Time, each outstanding Stock Option for which such an
election has not been made shall be converted into an option (or a new
substitute option shall be granted) to purchase the number of shares of AIMCO
Common Stock (rounded up to the nearest whole share) equal to the number of
shares of Common Stock subject to such option multiplied by the Conversion
Ratio (as calculated pursuant to the definition thereof, without regard to
the proviso regarding AIMCO's election) at an exercise price per share of
Common Stock (rounded down to the nearest penny) equal to the former exercise
price per share of Common Stock under such option divided by the Conversion
Ratio (as calculated pursuant to the definition thereof, without regard to
the proviso regarding AIMCO's election), subject to adjustment based on the
applicability of certain provisions of the Code. Except as provided above,
the converted or substituted Stock Options shall be subject to the same terms
and conditions (including without limitation, expiration date, vesting and
exercise provisions) as were applicable to Stock Options immediately prior to
the Effective Time, except that all converted or substituted Stock Options
shall be vested and fully exercisable and optionees may exercise their
options through the expiration date unless their employment is terminated for
cause or they are removed as directors for cause.
Under certain circumstances under the Merger Agreement, the Company may be
required to pay a "Break-Up Fee" and "Break-Up Expenses" (both as defined in the
Merger Agreement) to
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIMCO if the Merger does not occur. The maximum amount payable by the
Company is $9.7 million.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT (A)
<TABLE>
<CAPTION>
(IN 000' S)
-----------
DECEMBER 31, MATURITY
1997 1996 DATE
------- ------- -----
<S> <C> <C> <C>
BONDS PAYABLE:
Brookdale Lakes (B) (D) $ 14,800 $ 14,800 12/26
Eagle's Nest (B) (D) 5,200 5,200 12/21
Cape Cod (B) (D) 8,100 8,100 12/21
LaJolla (B) (D) 10,000 10,000 12/21
Mesa Ridge (B) (D) 5,100 5,100 12/21
Braesview (B) (D) 20,500 20,500 12/21
Harbor Cove (B) (D) 5,900 5,900 12/21
Prime Crest (B) (D) 2,400 2,400 12/21
Royal Crest (B) (D) 3,400 3,400 12/21
Aspen Hills (B) (D) 9,800 9,800 12/21
Shallow Creek (B) (D) 2,300 2,300 12/26
Shallow Creek (C) (D) 2,300 -- 12/26
Franklin Oaks (B) (D) 17,700 17,700 12/21
Crossings of Bellevue (B) (D) (Q) 8,540 8,572 12/27
The Mills (B) (D) 14,575 14,575 12/26
Sandalwood (C) (D) 4,000 -- 12/36
Trails of Ashford (B) (D) 9,050 -- 12/36
Crossroads (B) (D) 6,000 -- 12/36
Privado Park (B) (D) 9,200 9,200 12/33
Shadow Creek (B) (D) 5,600 5,600 12/33
Vista Ventana (B) (D) 6,400 6,400 12/33
Quail Ridge (B) (D) 6,400 6,400 12/33
Tierra Bonita (B) (D) 6,000 6,000 12/33
The Stratford (B) (D) 5,945 5,945 12/21
Windridge (B) (D) 6,270 6,270 12/21
Bent Oaks (B) (D) 4,400 4,400 12/23
Sun Lake (E) 15,287 15,478 10/25
Falls of Bells Ferry (F) 28,335 28,935 02/09
Cypress Ridge (G) (H) 4,250 4,250 06/26
The Broadmoor (G) (H) 6,000 6,000 06/26
Madera Point (G) (H) 7,180 7,180 06/26
Madera Point (I) 887 -- 06/27
Stonybrook (I) 4,028 -- 10/12
Palencia (J) 13,250 -- 03/24
The Arbors (K) (L) 7,605 7,280 10/27
Ocean Oaks (K) (L) 10,295 10,920 10/27
Village Crossing (K) (L) 7,000 9,800 10/27
Haverhill Commons (K) (L) 9,100 10,950 10/27
-------- --------
Total Bonds Payable $313,097 $279,355
-------- --------
-------- --------
</TABLE>
<PAGE>
AMBASSADOR APARTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(In 000' s)
-----------
DECEMBER 31, MATURITY
1997 1996 DATE
---- ---- ----
<S> <C> <C> <C>
NOTES PAYABLE:
Bank One Loan (M) $-- $63,950 --
NACC Revolving Loan (M) 35,250 -- 12/98
CLNY Unsecured Line (N) 2,010 -- 05/98
Coral Cove (O) 3,999 4,031 04/26
Tatum Gardens (O) 3,456 3,483 04/26
Summit Creek (O) 3,555 3,583 04/26
Westway Village (O) 4,888 4,927 04/26
Country Club West (P) 11,344 -- 03/27
Courtney Park (P) 10,050 -- 03/27
------- -------
Total Notes Payable $74,552 $79,974
------- -------
------- -------
</TABLE>
(A) Debt is collateralized by substantially all of the assets of the respective
Property Partnerships.
(B) Permanent financing for these properties has been provided by variable rate
tax-exempt revenue bonds (the "Bonds"). Under the terms of the bond loan
agreements, the respective issuing Property Partnerships are to make
interest-only payments calculated using a variable rate determined by the
remarketing agents of the Bonds. The rates ranged from 3.00% to 5.67% for
the year ended December 31, 1997, from 2.5% to 7.0% for the year ended
December 31, 1996, and from 2.7% to 6.0% for the year ended December 31,
1995. Under certain conditions, the interest rate on the Bonds may be
converted to a fixed rate at the request of the respective Property
Partnership. A bondholder may tender the Bonds during the variable
interest rate period and receive principal, plus accrued interest through
the tender date. Upon tender, the remarketing agents will immediately
remarket the Bonds. In the event the remarketing agents fail to remarket
any of the Bonds, the Property Partnerships are obligated to purchase those
Bonds, for which they may draw on the appropriate credit enhancement
facility. The remarketing agents receive a fee of 0.08% per annum of the
outstanding Bond balance, payable quarterly in arrears. Such fees are
included as financing fees in the accompanying consolidated statements of
operations.
Under the terms of the bond loan agreements, the Bond proceeds were
deposited in escrow accounts with trustee third-party banks. The Bond
funds were used for development costs including the acquisition and
rehabilitation of the properties owned by the Property Partnerships. As of
December 31, 1997, approximately $250,000 remains in escrow for future
renovation programs.
(C) Permanent financing for these properties has been provided by variable rate
taxable bonds (the "Taxable Bonds"). Under the terms of the bond loan
agreements, the respective issuing Property Partnerships are to make
interest-only payments calculated using a variable rate determined by the
remarketing agents of the Taxable Bonds. The rates ranged from 5.55%
<PAGE>
AMBASSADOR APARTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to 6.70% for the period ended December 31, 1997. Under certain
conditions, the interest rate on the Bonds may be converted to a fixed
rate at the request of the respective Property Partnership. A
bondholder may tender the Taxable Bonds during the variable interest
rate period and receive principal, plus accrued interest through the
tender date. Upon tender, the remarketing agents will immediately
remarket the Taxable Bonds. In the event the remarketing agents fail to
remarket any of the Taxable Bonds, the Property Partnerships are
obligated to purchase those Taxable Bonds, for which they may draw on
the appropriate credit enhancement facility. The remarketing agents
receive a fee of 0.08% per annum of the outstanding Taxable Bond
balance, payable quarterly in arrears. Such fees are included as
financing fees in the accompanying consolidated statements of
operations.
(D) Credit enhancement has been issued by Federal National Mortgage Association
("FNMA") in a single facility (the "FNMA Facility") on approximately
$216.4 million of variable rate tax-exempt and variable rate taxable
bonds associated with 27 of the Company's properties (and Williamsburg).
FNMA has established three separate mortgage pools as collateral for
providing credit enhancement on the bonds. The first pool collateralizes
$143.4 million of variable rate tax-exempt bonds and $6.3 million of
variable rate taxable bonds relating to eighteen properties owned by
Ambassador VIII, L.P. The carrying value of the eighteen properties in
the first pool was approximately $191.9 million at December 31, 1997.
The second pool collateralizes $50.2 million of variable rate tax-exempt
bonds relating to eight properties owned by Ambassador I, L.P. The
carrying value of the nine properties in the second pool was
approximately $68.2 million at December 31, 1997. The third pool
collateralizes $16.5 million of variable rate tax-exempt bonds relating
to the Williamsburg property, whose carrying value approximated $14.8
million at December 31, 1997. The credit enhancement agreements are
collateralized by first mortgages on each of the properties. FNMA is
entitled to credit enhancement fees on the FNMA Facility at a weighted
average rate of 1.04% per annum of the base value of the bonds, less any
cash collateral. FNMA also receives a reserve fee of 0.38% per annum on
the amount of cash collateral with respect to the FNMA Facility. The
credit enhancement and reserve fees are payable monthly in advance.
Pursuant to the terms of the FNMA Facility agreements, the Company is
subject to certain financial covenants, including a 1.90 to 1.0
consolidated interest coverage ratio, as defined, and a consolidated
earnings before interest, taxes, depreciation and amortization
("EBITDA") to debt service ratio of 1.75 to 1.0, as defined.
At December 31, 1997 and 1996, the Company has posted $26.0 million
($6.0 million in cash and a $20 million standby commitment) and $15.2
million, respectively, as additional collateral with FNMA in an interest
bearing escrow account. The Company is also making monthly principal
reserve payments of approximately $326,000 to FNMA which will be used to
redeem bonds. The FNMA credit enhancement matures on December 1, 2021.
(E) Under the terms of the Sun Lake Bonds note agreement, the Company currently
makes monthly principal and interest payment based on a 30-year
amortization. The Sun Lake
<PAGE>
AMBASSADOR APARTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bonds bear an all in interest rate of 6.49% and were issued by the
Orange County Housing Finance Authority. The Sun Lake Bonds are also
guaranteed by FNMA and mature on October 1, 2025. The guaranty is
collateralized by a first mortgage on the property, whose carrying value
approximated $24.9 million at December 31, 1997.
(F) Under the terms of the Falls of Bells Ferry (the "Falls Bonds") loan
agreement, the issuing Property Partnership is to make interest payments
calculated using a one-year fixed rate determined by the remarketing
agents of the Falls Bonds which is adjusted annually on January 15. The
rate was 3.65% at December 31, 1997 and 3.55% at December 31, 1996.
Under certain conditions the interest rate on the Falls Bonds may be
converted to a long-term fixed rate at the request of the Property
Partnership.
The Falls Bonds are collateralized by an irrevocable letter of credit
issued by Guardian Savings and Loan Association ("Guardian"). Guardian
is entitled to a letter of credit fee of 1% per annum of the outstanding
amount of the letter of credit for the period from September 1, 1995
through August 15, 2004, and 2% per annum of the outstanding amount of
the letter of credit from August 16, 2004 through August 15, 2006, and 2
1/2% per annum from August 16, 2006 through February 1, 2009. The
letter of credit is collateralized by a mortgage on the property, whose
carrying value approximated $30.7 million at December 31, 1997, and cash
placed in escrow with Guardian of $2.7 million. The cash collateral
will be used to fund annual sinking fund payments until the collateral
is depleted. The letter of credit expires on February 1, 2009. The
total commitment outstanding under the letter of credit at December 31,
1997 is approximately $29.5 million.
A bondholder may tender the Falls Bonds during the one year fixed rate
period and receive principal, plus accrued interest through the tender
date. Upon tender, the remarketing agents shall immediately remarket
the Falls Bonds. In the event the remarketing agents fail to remarket
any of the Falls Bonds, the Property Partnership is obligated to
purchase the Falls Bonds, for which it may draw on the letter of credit.
The remarketing agents receive a fee of 0.325% per annum payable
quarterly in arrears. Such fees are included as financing fees in the
accompanying consolidated statement of operations.
(G) Permanent financing for these properties has been provided by fixed rate
tax-exempt term bonds (the "Term Bonds"). Under the terms of the bond
loan agreements, the respective issuing Partnerships are to make
interest-only payments using a fixed rate ranging from 5.3% to 6.35%
depending upon the maturity date of each series of bonds. The Term
Bonds are subject to mandatory redemption dates beginning on June 1,
2006 with final maturity of the Term Bonds on June 1, 2026.
(H) On October 1, 1996, the Company entered into insurance and indemnity
agreements ("Insurance and Indemnity Agreements") with Financial
Security Assurance, Inc. ("FSA") to provide credit enhancement for these
three bond issues. The Company made a ten year
<PAGE>
AMBASSADOR APARTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prepayment of the insurance premium in the amount of $775,937, which is
included in other assets and is being expensed over a ten year period.
In addition, an annual insurance premium will be due in the amount of
0.6% per annum payable monthly in advance on the face amount of the
bonds, commencing June 12, 2006. The Insurance and Indemnity Agreements
have expiration dates consistent with the redemption dates of the bonds
themselves with maturities that begin on June 1, 2006 with final
maturity of the bonds on June 1, 2026. The Insurance and Indemnity
Agreements are collateralized by first mortgages on the properties,
whose carrying value approximated $21.9 million at December 31, 1997.
(I) On May 1, 1997, the Company sold at par approximately $4.0 million of
tax-exempt bonds (the "Stonybrook Bonds") and approximately $900,000 of
tax-exempt subordinate bonds (the "Class B Madera Bonds") to TEB
Municipal Trust II ("TEB II"), a New York trust. The interest rate on
the Stonybrook Bonds is fixed at 10.0% per annum. The Stonybrook Bonds
are collateralized by the Stonybrook property whose carrying value
approximated $9.4 million at December 31, 1997. The interest rate on the
Class B Madera Bonds is fixed at 11.0% per annum. The Class B Madera
Bonds are collateralized by the Madera Point property whose carrying
value approximated $11.0 million at December 31, 1997.
Concurrent with its purchase of the bonds, TEB II sold a $4.9 million
Class A Receipt of beneficial interest in TEB II at a fixed rate of 9.5%
per annum, payable monthly. G.P. Holdings holds an approximately
$14,500 Class G Receipt, which is entitled to a distribution in an
amount equal to the excess of interest earned by TEB II from its
ownership of the Class B Madera Bonds and the Stonybrook Bonds over the
distributions paid to the Class A Receipt holders. Under the terms of
certain agreements between members of G.P. Holdings, the Company
receives 100% of any excess cash flows, as defined, from G.P. Holdings.
This amounted to approximately $5,000 for TEB II for the period from
May 1, 1997 through December 31, 1997.
(J) In March 1997, the Company assumed $13.3 million of fixed rate, tax-exempt
bonds with respect to Palencia (the "Palencia Bonds"). Pursuant to the
terms of the loan agreement, the Palencia Bonds bear interest at 7.65%
per annum. The Palencia bonds are collateralized by the Palencia
property whose carrying value approximated $15.9 million at December 31,
1997.
Upon the request of Banc One Capital Funding Corporation ("BOCFC"), the
holder of the Palencia Bonds, the Company may be required to purchase
the Palencia Bonds from BOCFC, on or after April 1, 1997, at a price
equal to the outstanding balance of the Palencia Bonds, plus accrued
interest, and any other amounts due BOCFC under the terms of a Put
Agreement between the Company and BOCFC. The obligation under the Put
Agreement is considered to be recourse to the Company.
<PAGE>
AMBASSADOR APARTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(K) Permanent financing for these properties had been provided by variable
rate, tax-exempt bonds (the "Prior Florida Bonds"). The $39.0 million
of Prior Florida Bonds were purchased in 1996 by TEB Municipal Trust I
("TEB I"), a New York trust. TEB I then sold $27.0 million in Class A
certificates, $10.0 million in Class B certificates, and approximately
$2.0 million in a Class G certificate. The Class G certificate was
owned by G.P. Holdings. G.P. Holdings, as the holder of the Class G
certificate, was entitled to a distribution in an amount equal to the
excess of interest earned by TEB I from its ownership of the Prior
Florida Bonds over the distributions paid to the Class A and Class B
certificate holders. During the third quarter ended September 30, 1997,
Prior Florida Bonds and, correspondingly, the trust certificates were
subject to a $300,000 partial redemption, thereby leaving an aggregate
outstanding balance of $38.7 million in trust certificates.
On October 27, 1997, the Housing Finance Authority of Volusia County,
Florida issued $17.9 million of variable rate tax-exempt bonds for the
benefit of The Arbors and Ocean Oaks properties, and the Housing Finance
Authority of Palm Beach County, Florida issued $16.1 million of variable
rate tax-exempt bonds for the benefit of Village Crossing and Haverhill
Commons (collectively, the "Florida Bonds"). The Company deposited the
proceeds from the Florida Bonds plus an additional $4.7 million into an
escrow account to redeem the Prior Florida Bonds.
Under the terms of the bond loan agreements, the respective issuing
Property Partnerships are to make interest-only payments calculated
using a variable rate determined by the remarketing agents of the
Florida Bonds. The rates ranged from 3.55% to 4.00% from October 27,
1997 through December 31, 1997. The interest rate is currently reset on
a weekly basis. The remarketing agents receive a fee of 0.10% per annum.
On December 1, 1997, the Company redeemed $38.7 million of the Prior
Florida Bonds owned by TEB I. TEB I then redeemed the Class B and Class
G certificates and reimbursed the credit enhancer for the Class A
certificates for the draw on its direct pay letter of credit with
respect to the Class A certificates. At that time, TEB I dissolved and
triggered a Special Put Event under the Put Agreement with the Class B
Receipt holders. The Company paid a premium payment of approximately
$556,000 to the Class B Receipt holders, which is included as a loss on
sale of investment, net of minority interest, in the consolidated
statements of operations.
Under the terms of certain agreements between members of G.P. Holdings,
the Company receives 100% of any excess cash flows, as defined, from
G.P. Holdings. This amounted to approximately $497,000 for TEB I for
the year ended December 31, 1997.
(L) On October 27, 1997, the Company obtained credit enhancement for the
Florida Bonds. The Florida Bonds are credit enhanced by four separate
letters of credit aggregating $34.5 million from Credit Lyonnais New
York Branch (" CLNY") and a corresponding confirming letter
<PAGE>
AMBASSADOR APARTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of credit issued by Republic Bank of New York. Under the terms of the
CLNY letter of credit agreement, CLNY was paid an origination fee of
$345,030 and is also entitled to a letter of credit fee of 1.5% per
annum of the stated amount of the letters of credit payable monthly in
arrears. An additional fee of 0.25% per annum of the stated amount of
the letter of credit is due to CLNY as long as a confirming letter of
credit remains in place. The CLNY letters of credit expire not later
that October 27, 2002. The letters of credit are collateralized by
first mortgages on the properties, whose carrying value approximated
$38.7 million at December 31, 1997.
Commencing on January 1, 1998 and on each April 1, July 1, October 1 and
January 1, thereafter, the Company is obligated to deposit, as
additional collateral for the letters of credit, cash into a sinking
fund equal to the principal portion of the quarterly amortization
payment which would be due on each such date on a loan in the amount of
the aggregate stated amount of such letters of credit being amortized
over a term of twenty-five years with an interest rate of 8.00% per
annum.
(M) On June 22, 1997, the Company entered into a secured revolving credit
facility to refinance its credit facility with Bank One, Arizona (the
"Bank One Loan") with Nomura Asset Capital Corporation ("NACC" ) (as
amended, the "NACC Revolving Loan"). The Bank One Loan had an interest
rate of between LIBOR plus 1.70% and 1.95% and had a maximum commitment
of $75 million based on the amount of collateral posted.
The NACC Revolving Loan bears interest at LIBOR plus 1.50% and has a
maximum commitment of $75 million subject to the amount of collateral
pledged by the Company. As of December 31, 1997, six properties were
pledged as collateral under the NACC Revolving Loan, and approximately
$35.3 million was outstanding. The value of the pledged collateral is
adjusted periodically to reflect current valuations of the properties.
As of December 31, 1997, the six properties pledged as collateral would
have provided an additional $2.6 million of availability under the NACC
Revolving Loan. On September 30, 1997, the Company amended the maturity
date of the NACC Revolving Loan from December 31, 1997 to December 31,
1998.
On June 26, 1997, the Company entered into an amendment to the NACC
Revolving Loan to permit the Company, notwithstanding the maximum
availability provisions, to borrow $20.7 million to acquire the Park
Colony and Cedar Creek properties. This advance was intended to serve
as short-term financing and was required to be repaid by July 2, 1997.
On June 30, 1997, the Company repaid the $20.7 million short-term bridge
loan with proceeds from the Company's Offering (see Note 11). Pursuant
to the terms of the NACC Revolving Loan agreements, the Company is
subject to certain financial covenants including a 1.40 to 1.0 debt
service coverage ratio, as defined.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(N) On May 28, 1997, the Company entered into an unsecured revolving credit
facility with CLNY for $25.0 million (as amended, the "CLNY Unsecured Line
of Credit" ) at the Prime Rate plus 1.25% or, at the option of the Company,
the Eurorate plus 2.25% or LIBOR plus 2.25%. Unpaid principal, together
with any accrued or unpaid interest thereon, is due and payable 120 days
following the date of any advance under the CLNY Unsecured Line of Credit.
On September 30, 1997, the Company amended the maturity date of the CLNY
Unsecured Line of Credit from December 31, 1997 to May 23, 1998. As of
December 31, 1997, the CLNY Unsecured Line of Credit provided $6.25 million
of working capital availability (the "CLNY Working Capital Availability"),
of which approximately $2.0 million was outstanding. The remaining
availability may be utilized for acquisitions. Pursuant to the terms of
the CLNY Unsecured Line of Credit agreements, the Company is subject to
certain financial covenants including a 2.00 to 1.0 consolidated interest
coverage ratio, as defined, and a consolidated EBITDA to debt service ratio
of 1.75 to 1.0, as defined. The consolidated interest coverage ratio
covenant was changed by CLNY to 1.90 to 1.0 for the quarter ended December
31, 1997.
Effective January 30, 1998, the Company amended the CLNY Unsecured Line of
Credit (the "CLNY Amendment"). The CLNY Amendment provides the Company
with $10 million of borrowing capacity (the "CLNY Swap Availability") to be
used by the Company solely to meet, or to reimburse itself for previous
payments made to meet, collateral requirements for CLNY made on or after
January 12, 1998 relating to the Company's outstanding swap agreements with
CLNY. This $10 million of CLNY Swap Availability is in addition to the
$6.25 million of CLNY Working Capital Availability, but does not increase
the aggregate $25 million availability. The Company paid $200,000, plus
expenses, for the CLNY Amendment. The CLNY Amendment further provides for
a method of required paydowns to the CLNY Unsecured Line of Credit under
various circumstances.
(O) Permanent financing for these properties has been provided by a $16.1
million conventional fixed rate loan from NACC. Under the terms of the
loan agreement, the Company makes monthly principal and interest payments
based on an interest rate of 7.88% per annum and a 30-year amortization.
The loan is collateralized by first mortgages on the four properties, whose
carrying value approximated $23.3 million at December 31, 1997.
(P) On March 5, 1997, permanent financing for these properties was provided by
a $21.5 million conventional fixed rate loan from NACC. Under the terms of
the loan agreement, the Company makes monthly principal and interest
payments based on an interest rate of 8.08% per annum and a 30-year
amortization. The loan is collateralized by first mortgages on the two
properties, whose carrying value approximated $24.0 million at December 31,
1997.
(Q) On April 17, 1997, the Company refinanced $8.5 million of
fixed-rate, tax-exempt bonds issued by the Industrial Development Board
of the Metropolitan Government of Nashville and Davidson County (the
"Bellevue Bonds") and secured by the Crossings of Bellevue
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
property whose carrying value approximated $15.8 million at December 31,
1997. The Bellevue Bonds now bear interest at a floating rate that is
reset weekly by the remarketing agent at a minimum rate required to
remarket the bonds at par. The Bellevue Bonds are credit enhanced by
the FNMA Facility and mature on December 15, 2027. Prior to the
refinancing the Bellevue Bonds, the Company made monthly principal and
interest payments based on a 30 year amortization. The Bellevue Bonds
bore interest at 9.3%.
INTEREST RATE PROTECTION FACILITIES
On August 31, 1994, the Company acquired an interest rate cap for
approximately $5.6 million to protect itself from interest rate fluctuations.
On March 14, 1996, the Company sold its interest rate protection contract for
approximately $1.5 million. As a result of this sale, the Company recognized a
$2.1 million loss, net of minority interest.
On March 14, 1996, the Company entered into swap transactions (the "Basis
Risk Swap") with Nomura Capital Services, Inc. ("NCSI" ) (subsequently assigned
to Salomon Brothers) pursuant to which the Company pays to Salomon Brothers a
variable rate (72.5% of 90-day LIBOR) on a notional amount of $130.0 million
(composed of a $55 million and a $75 million agreement). The Company receives a
floating rate based on the Kenny Index. The Basis Risk Swap matures on February
26, 1999. As a result of the cancellation of certain swaps in December 1996
(described below), the notional of $103.5 million of the Basis Risk Swap no
longer provides the Company a hedge against interest rate risk and has,
therefore, been recorded at its fair value. The fair value of the $103.5
million notional amount was approximately $588,000 and $798,000 at December 31,
1997 and 1996, respectively, and is included in other liabilities in the
consolidated balance sheets. In 1997, a fair value adjustment of approximately
$140,000 was recorded in general and administrative expenses in the consolidated
statements of operations. At December 31, 1997 and 1996, respectively, the
Company had approximately $1.5 million and $4.2 million posted as collateral
with respect to the Basic Risk Swap.
On October 3, 1996, the Company entered into an interest rate swap
transaction (the "Goldman Swap") with Goldman Sachs Capital Markets, L.P. (
"Goldman" ) pursuant to which the Company pays a fixed rate on a notional amount
of $26.5 million of its variable rate tax-exempt bonds. Under this swap
agreement, the Company pays a fixed rate of 6.84% to Goldman and receives a
floating rate based on 90-day LIBOR. At both December 31, 1997 and 1996, the
Company had approximately $565,000 posted as collateral with respect to the
Goldman Swap. The swap agreement matures on October 3, 2003.
On December 9, 1996, the Company canceled certain of its swap agreements.
The loss on cancellation of the swap agreements of approximately $1.4 million is
being amortized over the original life of the swaps and recognized as an
adjustment to interest expense on the underlying bonds.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also on December 9, 1996, the Company entered into a swap transaction with
CLNY. Pursuant to this swap agreement, the Company pays a fixed rate on a
notional amount of $186.5 million (including $16.5 of Williamsburg debt) of its
variable rate tax-exempt bonds. Under the terms of the agreement, the Company
pays to CLNY a fixed rate of 4.636% on a notional amount of $186.5 million and
receives a floating rate based on the PSA Municipal Swap Index. The swap
agreement matures on December 9, 2003.
Effective March 3, 1997, the Company entered into a swap transaction with
CLNY in order to hedge itself against interest rate fluctuations with respect to
the bonds secured by the Crossroads property. Pursuant to the terms of the
swap agreement, the Company will pay a fixed rate of 4.85% per annum on a
notional amount of $6.0 million and receive a variable rate based on the PSA
Municipal Swap Index. The swap agreement terminates on March 3, 2004.
Pursuant to the terms of the swaps and related credit support agreements,
the Company is required to post collateral to the swap providers for an amount
equal to their exposure, as defined, in each case to the extent that a specified
threshold is exceeded. The collateral posted by the Company may be in the form
of cash or governmental securities as determined by the Company. At December
31, 1997, the Company has posted approximately $5.2 million (including
Williamsburg) in cash collateral under its swap agreements. The Company
estimates that for every .25% decrease in the LIBOR interest rate yield curve,
it will be required to post approximately $2 million of additional collateral
with the swap providers. If interest rates rise, the Company estimates that for
every .25% increase in the LIBOR interest rate yield curve, recovery of the
posted collateral of a similar amount will be received up to the outstanding
collateral balances.
Effective April 17, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $756,370 to protect itself against
interest rate fluctuations with respect to bonds encumbering the Crossings of
Bellevue and Trails of Ashford properties. Pursuant to the terms of the
interest rate cap agreement, the interest rate is limited to 4.95% per annum on
a notional amount of $17.6 million. The interest rate cap agreement terminates
on April 17, 2004.
Effective April 25, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $234,000 to protect itself against
interest rate fluctuations with respect to the bonds secured by the Sandalwood
property. Pursuant to the terms of the interest rate cap agreement, the
interest rate is limited to 6.5% per annum on a notional amount of $4.0 million.
The interest rate cap agreement terminates on April 26, 2004.
Effective September 11, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $58,000 to protect itself against
interest rate fluctuations with respect to the taxable bonds secured by the
Shallow Creek property. Pursuant to the terms of the interest rate cap
agreement, the interest rate is limited to 6.53% per annum on a notional amount
of $2.3 million. The interest rate cap agreement terminates on September 11,
2002.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER
Interest costs were as follows:
<TABLE>
<CAPTION>
(In Thousands)
Year Ended December 31,
----------------------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Interest incurred................. $22,569 $14,145 $8,903
Interest paid..................... 22,928 13,232 8,995
</TABLE>
Scheduled principal payments of bonds and notes payable and sinking fund
deposits as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN 000'S)
----------
<S> <C>
1998................. $55,261
1999................. 5,430
2000................. 5,800
2001................. 6,194
2002................. 6,611
Thereafter........... 308,353
----------
$387,649
----------
----------
</TABLE>
5. ESCROW DEPOSITS - RESTRICTED
Escrow deposits consist primarily of reserves for (i) collateral for
swap contracts entered into by the Company, (ii) recurring capital
expenditures, (iii) real estate taxes, (iv) insurance, (v) sinking fund
deposits, and (vi) additional collateral for debt.
6. NOTE RECEIVABLE - OFFICER
Concurrent with the Offering, the Operating Partnership made a limited
recourse loan to a senior executive of the Company in the amount of $1.0 million
which he used to pay income taxes due in connection with the transfer to him of
156,250 Common Units. The loan was collateralized by a subordinate pledge of
these Common Units. The loan bore interest at 8% per annum and had a maturity
date of March 1, 1998. On December 29, 1997, the senior executive repaid the
entire outstanding principal balance on this loan.
7. UTILITY DEPOSITS
Certain Property Partnerships are required to place escrow deposits with
local utility companies. The deposits are typically for a two year period and
accrue interest at an average rate of approximately 4% per annum. Total utility
deposits, including accrued interest, at December 31,
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 and 1996 are approximately $1.1 million and $1.0 million, respectively.
Such deposits are included in accounts receivable.
8. STOCK OPTION PLAN
The Company has established a stock option plan for the purpose of
attracting and retaining directors, executive officers and other significant
employees via three stock incentive plans (collectively, the "Stock Incentive
Plan"). The 1994 Stock Incentive Plan, as amended, authorized the issuance of
options to purchase 469,000 shares of Common Stock. The 1996 Stock Incentive
Plan, as amended in March 1997, authorized the issuance of options to purchase
250,000 shares of Common Stock. The Board of Directors of the Company
established a new stock option plan in 1997 (the "1997 Stock Incentive Plan"),
which authorized the issuance of options to purchase up to 1.6 million shares of
Common Stock.
Options outstanding as of December 31, 1997, have exercise prices ranging
from $15.53 to $24.25, vest in certain cases immediately upon the grant date or
up to four years, and have terms of five to ten years.
At December 31, 1997, options for 1,654,490 shares of Common Stock are
available for grant under the Stock Incentive Plan.
Information on stock options is shown in the following table:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
- ----------------------------------------------------- ---------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
January 1, 1995 342,000 $16.00
Options granted 19,000 15.64
--------
December 31, 1995 361,000 15.98 160,999 $15.95
Options granted 230,500 20.26
--------
December 31, 1996 591,500 17.63 391,750 $16.90
Options granted 73,010 23.68
Options exercised (192,000) 16.65
Options expired (25,000) 22.00
--------
December 31, 1997 447,510 18.80 384,128 $18.07
--------
--------
</TABLE>
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Exercisable Options at
Options Outstanding at December 31, 1997 December 31, 1997
----------------------------------------------------------- ----------------------
Weighted
Average Weighted
Remaining Average
Range of Weighted Average Life Exercise
Exercise Prices Shares Exercise Price (Years) Shares Price
--------------- ------- ---------------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
$15.53 to $20 277,000 $ 16.39 6.8 277,000 $ 16.39
$21 to $24.25 170,510 22.72 9.2 107,128 22.40
------- ---------------- --------- ------- --------
447,510 $ 18.80 7.7 384,128 $ 18.07
------- ---------------- --------- ------- --------
------- ---------------- --------- ------- --------
</TABLE>
The effects on 1997, 1996, and 1995 pro forma net income and pro forma
earnings per common share of amortizing to expense the estimated fair value of
stock options are not necessarily representative of the effects on net income to
be reported in future years due to such things as the vesting period of the
stock options, and the potential for issuance of additional stock options in
future years. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation cost been determined using the fair market value-based accounting
method for options granted in 1997, 1996, and 1995, pro forma information would
be as follows (in thousands, except for earnings per share information):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Unaudited pro forma net (loss) income available to common
shareholders......................................... $(2,003) $(5,068) $9,862
Unaudited pro forma (loss) earnings per common share -
basic and diluted.................................... (0.20) (0.57) 1.10
</TABLE>
The weighted average fair value of an option granted in 1997, 1996, and
1995 was $2.52, $6.16 and $5.16, respectively. The Black-Scholes option
pricing model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. 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 the options granted.
For purposes of fair market value disclosures, the fair market value of an
option grant was estimated using the Black-Scholes option pricing model with
the following weighted-average assumptions:
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Risk-free interest rate. . . 5.8% 5.7% 6.8%
Dividend yields. . . . . . . *0.0% *0.0% *0.0%
Volatility . . . . . . . . . 19.6% 19.0% 19.0%
Expected life of option. . . 1.0 4.6 5.0
</TABLE>
* Management believes that the stock price reflects
the expected dividend rate.
9. SAVINGS PLAN
Effective January 1, 1996, the Company established for the employees of
the Company a retirement plan with a salary deferral retirement feature,
which qualifies under section 401 of the Code (the "401(k) Plan"). The
401(k) Plan permits the employees of the Company to defer a portion of their
compensation in accordance with the provisions of section 401(k) of the Code.
The 401(k) Plan allows participants to defer up to 15% of their eligible
compensation on a pre-tax basis subject to certain maximum amounts. In
addition, a profit sharing feature of the 401(k) Plan provides for a
contribution by the Company to be made annually on behalf of each participant
in an amount, if any, as determined by the Company based upon a
to-be-determined percentage of increases in profitability from year to year.
The Company contributed a total of approximately $33,000 in February 1997, on
behalf of the participants. Amounts contributed by the Company on behalf of
the participant will vest over a period of five years (20% per year).
Amounts contributed by the Company and amounts contributed by the
participants will be held in trust until distributed to the participant
pursuant to the provisions of the 401(k) Plan.
10. PREFERRED STOCK
The Company is authorized to issue up to 20 million shares of preferred
stock. On August 15, 1996, the Company issued 1,351,351 shares of Class A
Preferred Stock, par value $.01, for $18.50 per share or an aggregate amount
of $25 million. Net of underwriting discounts and expenses, the Company
received approximately $24.1 million in net proceeds from the issuance. The
Company contributed the proceeds to the Operating Partnership in exchange for
1,351,351 Class A Preferred Units of the Operating Partnership. The
Operating Partnership, in turn, used such proceeds primarily for property
acquisitions.
The dividend on the shares of Class A Preferred Stock issued and
outstanding is paid quarterly at an annual rate of (i) $1.68 per share of
Class A Preferred Stock, on or prior to August 14, 1997, (ii) for the period
August 15, 1997 through August 14, 1998, $1.73 per share of Class A Preferred
Stock, (iii) for the period August 15, 1998 through August 14, 1999, $1.78
per share of Class A Preferred Stock, (iv) for the period August 15, 1999
through August 14, 2001, $1.84 per share of Class A Preferred Stock, (v) for
the period August 15, 2001 through August 14, 2002, $1.89 per share of Class
A Preferred Stock, and (vi) on or after August 15, 2002, the greater of (x)
$1.68 per Class A Preferred Stock, per annum or (y) the product of 1.05 of
the dividend paid to Common
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock. Each share of Class A Preferred Stock is convertible into one share
of Common Stock at the sole and absolute discretion of the holder.
The Company has the right to redeem the Class A Preferred Stock on or after
August 15, 2001. Prior to August 14, 2002, the Company has the right to redeem
this Class A Preferred Stock at a premium of 1.06% of the per share purchase
price of $18.50. The premium to be paid upon redemption of the Class A
Preferred Stock decreases over an eight year period to zero by August 15, 2010.
In the event of a change of ownership of the Company, the Company may be
required by the holder of Class A Preferred Stock to purchase all of the shares
of Class A Preferred Stock at a price equal to the lesser of (i) $19.98 or (ii)
the price at which the Company has the right to redeem shares of Class A
Preferred Stock from the holders as described above (see Note 3).
Except as limited by law, the holders of the Class A Preferred Stock are
entitled to vote or consent on all matters submitted to the holders of Common
Stock together with the common stock as a single class. Each share of Class A
Preferred Stock will entitle the holder to one vote for each share of common
stock into which such Class A Preferred Stock is convertible as of the record
date for such vote or consent.
11. SHELF REGISTRATION
In June 1997, the Company registered 2.5 million shares of Common Stock
pursuant to an equity shelf registration statement, of which 1.3 million
registered Common Shares were sold on June 30, 1997 (the "Offering") at prices
between $22.375 and $22.625. The closing price of a Common Share on June 17,
1997 (the date the Company entered into an agreement to sell 1.3 million shares
of Common Stock) was $22.625. The Company received gross proceeds of
approximately $29.3 million; net proceeds approximated $28.8 million. The
Company used $20.7 million of the net proceeds received from the Offering to
repay the short-term bridge loan borrowed pursuant to the amendment to the NACC
Revolving Loan used to acquire the Cedar Creek and Park Colony properties and
the balance to repay a portion of the principal outstanding under the NACC
Revolving Loan and the CLNY Unsecured Line of Credit.
12. DIVIDENDS AND DISTRIBUTIONS TO STOCKHOLDERS AND MINORITY INTEREST
The total dividends declared and paid to holders of Common Stock in 1997
and 1996 were approximately $15.7 million and $14.3 million, respectively, each
representing $1.60 per share. Of the dividends paid to stockholders in 1997,
approximately $1.10 per share of Common Stock is considered to be a return of
capital.
The total dividends authorized for payment to holders of Class A Preferred
Stock in 1997 and 1996 were approximately $2.3 million and $851,000,
respectively, representing $1.70 and $0.63 per share, respectively. Dividends
paid to holders of Class A Preferred Stock in 1997 and 1996 were approximately
$2.3 million and $284,000, respectively.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total distributions to the Minority Interest include distributions to the
Common Units held by the Limited Partners as well as distributions made to
Investor I and Investor II. Amounts declared in 1997 and 1996 for the Common
Units held by the Limited Partners each represent $1.60 per Common Unit. The
following table summarizes the distributions declared and paid to the Minority
Interest during 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
For the year ended December 31,
-----------------------------------------
1997 1996
------------------- -------------------
Declared Paid Declare Paid
------- ---- ------- -----
<S> <C> <C> <C> <C>
Limited Partners.... $1,447 $1,447 $1,542 $1,542
Investor I.......... 1,826 1,756 1,274 1,129
Investor II......... 527 497 346 308
</TABLE>
13. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computations of basic and diluted
earnings per share of Common Stock:
<TABLE>
<CAPTION>
Dollars in Thousands
Except For Per Share Amounts
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income before extraordinary
item. . . . . . . . . . . . . . $2,542 $1,094 $5,587
Preferred stock dividends. . . . . 2,296 851 --
-------- -------- -------
Net income available to
common stockholders before
extraordinary item. . . . . . 246 243 5,587
Extraordinary item . . . . . . . . 1,384 4,653 4,360
-------- -------- -------
Numerator for basic and diluted
earnings per share-income
available to common
stockholders . . . . . . . . $(1,138) $(4,410) $9,947
-------- -------- -------
-------- -------- -------
Denominator:
Denominator for basic earnings
per share - weighted-
average shares. . . . . . . . 9,834,710 8,958,525 8,958,525
Effect of dilutive securities:
Employee stock options. . . . 101,163 53,585 --
---------- ---------- ---------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions . . . . . . . . . 9,935,873 9,012,110 8,958,525
---------- ---------- ---------
---------- ---------- ---------
Basic earnings per share. . . . . . . .$ (0.12) $ (0.49) $ 1.11
---------- ---------- ---------
---------- ---------- ---------
Diluted earnings per share. . . . . . . $(0.11) $(0.49) $1.11
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase 57,510 shares of Common Stock at prices ranging from
$23.63 per share to $24.25 per share and conversions into Common Stock of Common
Units, Class A Preferred Stock and Investors I and II limited partnership
interests in certain of the Company's consolidated subsidiaries were not
included in the computation of diluted earnings per share because of
antidilutive effects.
For additional disclosures regarding Investors I and II, employee stock
options and Class A Preferred Stock, see Notes 2, 8, and 10, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by management in estimating
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates fair value.
ESCROW DEPOSITS-RESTRICTED: The carrying amount reported in the balance
sheet for escrow deposits approximates fair value.
ESCROWED BOND FUNDS-RESTRICTED: The carrying amount reported in the
balance sheet for escrowed bond funds-restricted approximates fair
value.
NOTE RECEIVABLE-OFFICER: The carrying amount reported in the balance sheet
for the note receivable-officer approximates fair value.
INTEREST RATE CAPS: The fair value of the interest rate cap agreements is
estimated based on the Company's current replacement costs for similar
interest rate protection contracts.
INTEREST RATE SWAPS: The fair value of the interest rate swaps is estimated
based on current settlement values.
BONDS PAYABLE: The carrying amounts of the Company's variable rate bonds
approximate their fair value. Fair value of fixed rate bonds are
estimated based on quoted market prices for similar borrowings.
NOTES PAYABLE: The carrying amounts of the Company's notes payable
approximate their fair values based on the Company's current
borrowing rates for similar types of borrowing arrangements. The
carrying amount of accrued interest approximates its fair value.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and fair value of the Company's financial instruments
at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . $4,448 $4,448 $4,002 $4,002
Escrow deposits. . . . . . . . . . 30,588 30,588 30,897 30,897
Escrowed bond funds - restricted . 250 250 549 549
Note receivable - officer. . . . . -- -- 1,000 1,000
Interest rate caps . . . . . . . . 937 350 -- --
LIABILITIES:
Bonds payable. . . . . . . . . . . 313,097 313,097 279,355 279,355
Notes payable. . . . . . . . . . . 74,552 74,552 79,974 79,974
Interest rate swaps. . . . . . . . 588 5,123 798 1,459
</TABLE>
15. GAIN ON SALE OF RENTAL PROPERTY
On December 15, 1995, the Company sold the Laurelwood property for $7.7
million, net of closing costs. Laurelwood had a net cost basis of $6.6 million,
net of accumulated depreciation of approximately $464,000. The Company also
wrote-off approximately $20,000 of unamortized deferred financing fees. As a
result of the transaction described above, the Company realized a gain of
approximately $966,000, net of minority interest of approximately $104,000.
16. EXTRAORDINARY ITEMS
During 1997, unamortized deferred financing costs were written off upon
refinancing the Bank One Loan. As a result, the Company recognized an
extraordinary loss of approximately $900,000, which is net of minority interest
of $90,000. In addition, the Company's share of income/loss from investments in
and advances to unconsolidated real estate limited partnerships includes an
extraordinary loss of approximately $484,000, which is net of minority interest
of approximately $44,000.
During 1996, unamortized deferred financing costs were written off upon
reissuance of certain bonds in connection with replacement of credit
enhancement. As a result, the Company recognized an extraordinary loss of
approximately $4.3 million, which is net of minority interest of $1.5 million.
The Company also wrote off unamortized deferred financing costs upon the early
repayment of bridge financing; the Company recognized an extraordinary loss of
approximately $209,000, which is net of minority interest of $22,000. In
addition, the Company's share of
<PAGE>
income/loss from investments in unconsolidated real estate limited
partnerships includes an extraordinary loss of $159,000, which is net of
minority interest of $17,000.
As a result of the Company's acquisition of its fixed rate bonds (see Note
4) and subsequent discounts to the original purchase price paid to purchase such
bonds, the Company recognized an extraordinary gain of approximately $2.3
million in 1995, net of minority interest of $253,000 and the $562,000 write-off
of deferred financing costs and other loan fees associated with the bridge
financing used to acquire the fixed rate bonds. In addition, the Company's
share of income/loss from investments in unconsolidated real estate limited
partnerships includes extraordinary income of $2.0 million, net of minority
interest of $218,000.
17. ACQUISITIONS
During the year ended December 31, 1997, the Company acquired the
properties listed below. Each property was purchased from an unaffiliated third
party. The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the acquired assets are included in the statement
of operations from their respective dates of acquisition. Acquisition cost
includes the purchase price of the property and related closing costs.
<TABLE>
<CAPTION>
(In thousands)
Purchase Acquisition
Date Property Location Units Cost
- --------- -------------- --------------- ----- ---------------
<S> <C> <C> <C> <C>
3/11/97 Palencia (1) Tampa, FL 420 $15,387
6/27/97 Park Colony (2) Norcross, GA 352 14,709
6/27/97 Cedar Creek (2) San Antonio, TX 392 7,333
</TABLE>
(1) The Company assumed $13.3 million of fixed rate tax-exempt bonds,
which are collateralized by Palencia.
(2) The Company financed the acquisitions of Park Colony and Cedar Creek
using borrowings under the NACC Revolving Loan (see Note 4).
18. LEGAL PROCEEDINGS
The Company is involved in a variety of legal proceedings arising in the
ordinary course of business. It is management's belief that, collectively, all
such proceedings are not expected to have a material impact on the Company's
financial position.
19. SUBSEQUENT EVENTS
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 4, 1998, the Board of Directors of the Company (the "Board")
authorized distribution payments of approximately $4.6 million, or $0.40 per
Common Unit, to holders of Common Units of the Operating Partnership for the
quarter ended December 31, 1997. The distributions were paid on February 17,
1998. The Board also authorized distribution payments of $584,459, or $0.4325
per Preferred Unit, to holders of Preferred Units of the Operating Partnership
for the quarter ended December 31, 1997. This distribution was also paid on
February 17, 1998.
On February 4, 1998, the Board declared a quarterly dividend of $0.40 per
share of Common Stock to the Common Stockholders of the Company for the quarter
ended December 31, 1997. The dividends were paid on February 17, 1998, to
holders of record as of February 12, 1998. The Board also authorized a
quarterly dividend of $0.4325 per Preferred Stock to the holder of Preferred
Stock of the Company for the quarter ended December 31, 1997. This dividend was
also paid on February 17, 1998.
In November 1997, the Company obtained a $20 million standby commitment
(the "Standby Commitment") from Bank of America National Trust and Savings
Association for the benefit of FNMA. On February 4, 1998, under the terms of
FNMA's Consent and the Standby Commitment, FNMA released the Standby Commitment.
In connection with the release, the Company wrote off approximately $349,000 of
unamortized deferred financing costs.
On March 5, 1998, the Industrial Development Authority of the City of
Phoenix, Arizona issued $6.0 million of variable rate, tax-exempt bonds (the
"Heather Ridge Bonds") for the benefit of the Heather Ridge property. The
Heather Ridge Bonds, which are collateralized by the Heather Ridge property, are
credit enhanced under the FNMA Facility. The Heather Ridge Bonds will mature on
December 15, 2037 and bear interest at a floating rate that is reset weekly by
the remarketing agent at the minimum rate required to remarket the bonds at par.
The Company used net proceeds of $5.5 million to repay a portion of the
outstanding principal on the NACC Revolving Loan and the remainder to fund
working capital. In addition, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $9,000 to protect itself against
interest rate fluctuations with respect to the Heather Ridge Bonds. Pursuant to
the terms of the interest rate cap agreement, the interest rate is limited to
4.8% per annum on a notional amount of $6.0 million. The interest rate cap
agreement terminates on March 15, 1999.
<PAGE>
AMBASSADOR APARTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. PRO FORMA FINANCIAL INFORMATION - UNAUDITED
The following unaudited table of pro forma information has been prepared as
if the acquisition of three properties in 1997, the acquisition of 13 properties
in 1996, and the formation of G.P. Holdings had occurred as of the beginning of
each year presented. In management's opinion, the pro forma is not indicative
of consolidated results of operations that may have occurred had the above
transactions taken place on January 1 of each year.
<TABLE>
<CAPTION>
(In Thousands except
per share amounts)
Pro Forma for the Year Ended
----------------------------
(unaudited)
1997 1996
------------ -----------
<S> <C> <C>
Total revenues........................... $96,099 $92,473
Property operating expenses.............. 44,498 41,156
Depreciation and amortization............ 20,993 19,883
Interest................................. 26,326 26,123
Income from investment in
unconsolidated real estate limited
partnerships........................ (402) (218)
------- -------
Total expenses........................... 91,415 86,944
------- -------
Income before minority interest, loss on
sale of investment, loss on sale of
interest rate cap, and extraordinary
item................................ $ 4,684 $ 5,529
------- -------
------- -------
Income per share of Common Stock -
diluted............................. $ 0.43 $ 0.55
------- -------
------- -------
</TABLE>
The pro forma financial information includes the following adjustments:
(i) an increase to rental revenues, property operating expenses and related
interest expense to reflect the acquisitions in 1996 and 1997; (ii) an increase
in general and administrative expense to reflect additional costs associated
with increasing the size of the portfolio; (iii) an increase in depreciation to
reflect the acquisitions noted in (i) above; and (iv) an increase in income from
investment in unconsolidated real estate limited partnerships to reflect the
formation of G. P. Holdings.
Income has not been reduced for Minority Interests, and income per share
assumes that all limited partnership interests in the Operating Partnership have
been converted to shares of Common Stock; therefore, the total Common Stock
outstanding at January 1, 1997 and 1996 would have been 10,840,707 and
9,976,093, respectively.
<PAGE>
AMBASSADOR APARTMENTS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION
------------------------------- -----------------------------
BUILDINGS, BUILDINGS &
FURNITURE IMPROVEMENTS
ENCUM- & FURNITURE &
DESCRIPTION BRANCES LAND EQUIPMENT LAND EQUIPMENT TOTAL
----------------------------- -------- ------- --------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Management Business $ 2,010 $ -- $ -- $ -- $ 1,597 $ 1,597
Properties:
Prime Crest (Austin, TX) 2,400 670 857 314 2,544 2,858
Royal Crest (Austin, TX) 3,400 805 1,183 392 3,321 3,713
Aspen Hills (Austin, TX) 9,800 2,051 4,891 -- 4,513 4,513
Eagle's Nest (San Antonio, TX) 5,200 975 1,791 181 4,393 4,574
LaJolla (San Antonio, TX) 10,000 1,944 1,434 484 10,592 11,076
Cape Cod (San Antonio, TX) 8,100 1,360 5,617 259 2,831 3,090
Braesview (San Antonio, TX) 20,500 2,599 14,916 380 5,429 5,809
Mesa Ridge (San Antonio, TX) 5,100 630 3,654 189 2,649 2,838
Harbor Cove (San Antonio, TX) 5,900 1,174 3,575 -- 1,529 1,529
Brookdale Lakes (Naperville, IL) 14,800 1,295 -- 234 18,077 18,311
Bent Oaks (Austin, TX) 4,400 1,078 3,823 16 1,001 1,017
Coral Cove (Clearwater, FL) 3,999 1,289 4,570 22 598 620
Mountain View
(Colorado Springs, CO) -- 644 8,552 28 875 903
Privado Park (Mesa, AZ) 9,200 600 6,898 39 2,056 2,095
Quail Ridge (Tucson, AZ) 6,400 1,202 4,023 28 1,201 1,229
Shadow Creek (Phoenix, AZ) 5,600 1,559 5,526 29 1,147 1,176
Summit Creek (Austin, TX) 3,555 1,067 4,013 18 560 578
Tatum Gardens (Phoenix, AZ) 3,456 916 4,171 14 373 387
Vista Ventana (Phoenix, AZ) 6,400 1,146 4,581 32 1,103 1,135
Cypress Ridge (Houston TX) 4,250 1,306 2,649 -- 1,262 1,262
The Mills (Houston, TX) 14,575 5,773 10,187 -- 3,466 3,466
Sandalwood (Houston, TX) 4,000 1,647 3,625 -- 1,928 1,928
Trails of Ashford (Houston, TX) 9,050 2,056 6,949 -- 1,998 1,998
Westway Village (Houston, TX) 4,888 2,961 4,506 -- 1,332 1,332
Stratford (San Antonio, TX) 5,945 1,583 8,722 -- 1,622 1,622
The Broadmoor (Austin, TX) 6,000 1,158 4,626 -- 1,124 1,124
Windridge (San Antonio, TX) 6,270 1,122 7,278 -- 903 903
Shallow Creek (San Antonio, TX) 4,600 1,083 5,017 -- 834 834
Tierra Bonita (Tucson, AZ) 6,000 1,550 6,250 -- 1,502 1,502
Country Club West (Greely, CO) 11,344 646 12,254 -- 829 829
Courtney Park (Fort Collins, CO) 10,050 1,556 10,344 -- 710 710
Crossroads (Phoenix, AZ) 6,000 432 7,004 -- 1,192 1,192
Franklin Oaks (Franklin, TN) 17,700 2,932 21,570 -- 1,094 1,094
Falls of Bells Ferry (Atlanta, GA) 28,335 6,250 25,751 -- 1,089 1,089
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD
-----------------------------------
BUILDINGS & DATE
IMPROVEMENTS CONSTRUCTED
FURNITURE & ACCUMULATED (C)
DESCRIPTION LAND EQUIPMENT TOTAL DEPRECIATION ACQUIRED(A)
----------------------------- ------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Management Business $ -- $ 1,597 $ 1,597 $771
Properties:
Prime Crest (Austin, TX) 984 3,401 4,385 696 Mar. 1990 (A)
Royal Crest (Austin, TX) 1,197 4,504 5,701 941 Mar. 1990 (A)
Aspen Hills (Austin, TX) 2,051 9,404 11,455 1,890 June 1991 (A)
Eagle's Nest (San Antonio, TX) 1,156 6,184 7,340 1,446 Jan. 1990 (A)
LaJolla (San Antonio, TX) 2,428 12,026 14,454 2,138 June 1990 (A)
Cape Cod (San Antonio, TX) 1,619 8,448 10,067 1,632 June 1990 (A)
Braesview (San Antonio, TX) 2,979 20,345 23,324 3,685 Nov. 1990 (A)
Mesa Ridge (San Antonio, TX) 819 6,303 7,122 1,249 Nov. 1990 (A)
Harbor Cove (San Antonio, TX) 1,174 5,104 6,278 1,061 June 1991 (A)
Brookdale Lakes (Naperville, IL) 1,529 18,077 19,606 3,957 Dec. 1990 (C)
Bent Oaks (Austin, TX) 1,094 4,824 5,918 743 Oct. 1993 (A)
Coral Cove (Clearwater, FL) 1,311 5,168 6,479 782 Oct. 1993 (A)
Mountain View
(Colorado Springs, CO) 672 9,427 10,099 1,487 Oct. 1993 (A)
Privado Park (Mesa, AZ) 639 8,954 9,593 1,349 Oct. 1993 (A)
Quail Ridge (Tucson, AZ) 1,230 5,224 6,454 866 Oct. 1993 (A)
Shadow Creek (Phoenix, AZ) 1,588 6,673 8,261 1,020 Oct. 1993 (A)
Summit Creek (Austin, TX) 1,085 4,573 5,658 727 Oct. 1993 (A)
Tatum Gardens (Phoenix, AZ) 930 4,544 5,474 708 Oct. 1993 (A)
Vista Ventana (Phoenix, AZ) 1,178 5,684 6,862 867 Oct. 1993 (A)
Cypress Ridge (Houston TX) 1,306 3,911 5,217 509 Aug. 1994 (A)
The Mills (Houston, TX) 5,773 13,653 19,426 1,767 Aug. 1994 (A)
Sandalwood (Houston, TX) 1,647 5,553 7,200 675 Aug. 1994 (A)
Trails of Ashford (Houston, TX) 2,056 8,947 11,003 1,086 Aug. 1994 (A)
Westway Village (Houston, TX) 2,961 5,838 8,799 884 Aug. 1994 (A)
Stratford (San Antonio, TX) 1,583 10,344 11,927 1,280 Sept. 1994 (A)
The Broadmoor (Austin, TX) 1,158 5,750 6,908 691 Sept. 1994 (A)
Windridge (San Antonio, TX) 1,122 8,181 9,303 1,009 Oct. 1994 (A)
Shallow Creek (San Antonio, TX) 1,083 5,851 6,934 682 Jan. 1995 (A)
Tierra Bonita (Tucson, AZ) 1,550 7,752 9,302 904 Feb. 1995 (A)
Country Club West (Greely, CO) 646 13,083 13,729 1,266 April 1995 (A)
Courtney Park (Fort Collins, CO) 1,556 11,054 12,610 1,070 April 1995 (A)
Crossroads (Phoenix, AZ) 432 8,196 8,628 758 May 1995 (A)
Franklin Oaks (Franklin, TN) 2,932 22,664 25,596 1,980 Aug. 1995 (A)
Falls of Bells Ferry (Atlanta, GA) 6,250 26,840 33,090 2,411 Aug. 1995 (A)
</TABLE>
S-1
<PAGE>
AMBASSADOR APARTMENTS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION
------------------------------- -----------------------------
BUILDINGS, BUILDINGS &
FURNITURE IMPROVEMENTS
ENCUM- & FURNITURE &
DESCRIPTION BRANCES LAND EQUIPMENT LAND EQUIPMENT TOTAL
----------------------------- -------- ------- --------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Madera Point (Mesa, AZ) $ 8,067 $ 453 $ 10,568 $ -- $ 785 $ 785
LaJolla de Tucson (Tucson, AZ) 4,967 954 3,929 -- 1,177 1,177
Stonybrook (Tucson, AZ) 4,028 1,732 7,206 -- 957 957
The Arbors (Deland, FL) 7,605 1,528 6,193 -- 414 414
Ocean Oaks (Port Orange, FL) 10,295 2,272 9,199 -- 533 533
Village Crossing
(West Palm Beach, FL) 7,000 2,015 7,238 -- 351 351
Haverhill Commons
(West Palm Beach, FL) 9,100 2,251 7,863 -- 510 510
Heather Ridge (Phoenix, AZ) 5,755 1,460 5,842 -- 713 713
Pine Shadows (Tempe, AZ) 7,350 1,890 7,561 -- 958 958
Crossings of Bellevue
(Nashville, TN) 8,540 1,871 13,918 -- 618 618
Hidden Lake (Tampa, FL) 4,605 1,257 4,599 -- 994 994
Legend Oaks (Tampa, FL) 8,263 1,939 7,178 -- 1,490 1,490
Sun Lake (Lake Mary, FL) 15,287 4,784 19,534 -- 1,397 1,397
Palencia (Tampa, FL) 13,250 3,015 12,372 -- 1,166 1,166
Park Colony (Norcross, GA) -- 2,469 12,240 -- 796 796
Cedar Creek (San Antonio, TX) 4,310 1,002 6,331 -- 433 433
-------- ------- --------- ------ ------------ --------
$387,649 $85,951 $362,578 $2,659 $100,566 $103,225
-------- ------- --------- ------ ------------ --------
-------- ------- --------- ------ ------------ --------
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD
-----------------------------------
BUILDINGS & DATE
IMPROVEMENTS CONSTRUCTED
FURNITURE & ACCUMULATED (C)
DESCRIPTION LAND EQUIPMENT TOTAL DEPRECIATION ACQUIRED(A)
----------------------------- ------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Madera Point (Mesa, AZ) $ 453 $ 11,353 $ 11,806 $804 Feb. 1996 (A)
LaJolla de Tucson (Tucson, AZ) 954 5,106 6,060 458 April 1996 (A)
Stonybrook (Tucson, AZ) 1,732 8,163 9,895 525 May 1996 (A)
The Arbors (Deland, FL) 1,528 6,607 8,135 340 Aug. 1996 (A)
Ocean Oaks (Port Orange, FL) 2,272 9,732 12,004 509 Aug. 1996 (A)
Village Crossing
(West Palm Beach, FL) 2,015 7,589 9,604 395 Aug. 1996 (A)
Haverhill Commons
(West Palm Beach, FL) 2,251 8,373 10,624 436 Aug. 1996 (A)
Heather Ridge (Phoenix, AZ) 1,460 6,555 8,015 309 Sept. 1996 (A)
Pine Shadows (Tempe, AZ) 1,890 8,519 10,409 400 Sept. 1996 (A)
Crossings of Bellevue
(Nashville, TN) 1,871 14,536 16,407 629 Oct. 1996 (A)
Hidden Lake (Tampa, FL) 1,257 5,593 6,850 249 Oct. 1996 (A)
Legend Oaks (Tampa, FL) 1,939 8,668 10,607 414 Oct. 1996 (A)
Sun Lake (Lake Mary, FL) 4,784 20,931 25,715 793 Nov. 1996 (A)
Palencia (Tampa, FL) 3,015 13,538 16,553 617 Mar. 1997 (A)
Park Colony (Norcross, GA) 2,469 13,036 15,505 297 Jun. 1997 (A)
Cedar Creek (San Antonio, TX) 1,002 6,764 7,766 157 Jun. 1997 (A)
------- ------------ -------- ------------
$88,610 $463,144 $551,754 $52,319
------- ------------ -------- ------------
------- ------------ -------- ------------
</TABLE>
S-2
<PAGE>
AMBASSADOR APARTMENTS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(Dollars in Thousands)
(Continued)
Depreciation on building and improvements is calculated on the straight-line
basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Building ............................ 30 to 40
Building improvements ............... 5 to 30
Furniture and equipment ............. 3 to 12
</TABLE>
The aggregate net cost of real estate assets for federal income tax purposes was
approximately $486.2 million at December 31, 1997.
The change in total real estate assets and accumulated depreciation for the
years ended
December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Real Estate Assets
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $495,292 $343,869 $235,916
Sale of rental property -- -- (7,024)
Acquisitions and improvements 56,462 151,423 114,977
-------- -------- --------
Balance, end of year $551,754 $495,292 $343,869
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Accumulated Depreciation
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $33,340 $19,910 $11,480
Depreciation expense 18,979 13,430 8,894
Sale of rental property -- -- (464)
-------- -------- --------
Balance, end of year $52,319 $33,340 $19,910
-------- -------- --------
-------- -------- --------
</TABLE>
<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
F-1
<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
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<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
--------- -------- --------
--------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<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
----- ----- -------- ---------
----- ----- -------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<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>
F-5
<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
-------- ---------- ---------
-------- ---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<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.
F-7
<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 depen
dent 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.
F-8
<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 capi
talizes 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 sig
nificant 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).
F-9
<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.
F-10
<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.
F-11
<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.
F-12
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
-------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
-------------------------------------------
-------------------------------------------
</TABLE>
_______________________________
(1) Conversion of the convertible preferred stock is not assumed in the
computation because its effect is anti-dilutive.
F-13
<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.
F-14
<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.
F-15
<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.
F-16
<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.
F-17
<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.
F-18
<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
-----------------------------------------
-----------------------------------------
</TABLE>
The cost was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
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>
F-19
<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>
F-20
<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):
<TABLE>
NOTES COMMISSIONS
RECEIVABLE RECEIVABLE
------------------------
<S> <C> <C>
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
------------------------
------------------------
</TABLE>
F-21
<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:
<TABLE>
<CAPTION>
CAPITAL
REAL ESTATE LIMITED PARTNERSHIP OWNERSHIP %
----------------------------------------------- -----------
<S> <C>
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%
</TABLE>
F-22
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INVESTMENTS IN REAL ESTATE LIMITED PARTNERSHIPS (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL
REAL ESTATE LIMITED PARTNERSHIP OWNERSHIP %
----------------------------------------------- -----------
<S> <C>
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%
</TABLE>
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.
F-23
<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>
F-24
<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.
F-25
<PAGE>
Insignia Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. ACCRUED AND SUNDRY LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
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
-------- -------
-------- -------
</TABLE>
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.
F-26
<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>
F-27
<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>
F-28
<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
--------------------
--------------------
</TABLE>
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.
F-29
<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):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 19,009
1999 3,149
2000 149,301
2001 99
2002 -
Later years 528
---------
$172,086
---------
---------
</TABLE>
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.
F-30
<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.
F-31
<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.
F-32
<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.
F-33
<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.
F-34
<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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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.
F-35
<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):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
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
</TABLE>
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>
F-36
<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>
F-37
<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>
F-38
<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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
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
------- ------- ------
------- ------- ------
</TABLE>
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%
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
</TABLE>
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.
F-39
<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.
F-40
<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.
F-41
<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.
F-42
<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).
F-43
<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.
F-44
<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.
F-45
<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):
<TABLE>
<S> <C>
1998 $17,567
1999 15,150
2000 13,156
2001 10,925
2002 9,047
Thereafter 19,767
-------------
Total minimum payments required $85,612
-------------
-------------
</TABLE>
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.
F-46
<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.
F-47
<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.
F-48
<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.
F-49
<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.
F-50
<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>
F-51
<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 interes (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.
F-52
<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
</TABLE>
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.
F-53
<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
</TABLE>
Third quarter results of 1996 include a $935,000 charge for unsuccessful
acquisition costs.
F-54
<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>
F-55
<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.
F-56
<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.
F-57
<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.
F-58
<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.
F-59
<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.
F-60
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
(COMPLETED TRANSACTIONS)
INTRODUCTION
In May and September of 1997, Apartment Investment and Management
Company, a Maryland Corporation ("AIMCO"), directly or indirectly through a
subsidiary, acquired (the "NHP Stock Purchase") an aggregate of 6,930,122
shares of common stock ("NHP Common Stock") of NHP Incorporated ("NHP"). On
December 8, 1997, AIMCO acquired the remaining shares of NHP Common Stock in
a merger transaction accounted for as a purchase (the "Merger"). Pursuant to
the Merger, each outstanding share of NHP Common Stock was converted into
either (i) 0.74766 shares of AIMCO Class A Common Stock ("AIMCO Common
Stock") or (ii) at the shareholder's option, 0.37383 shares of AIMCO Common
Stock and $10.00 in cash. As a result of the Merger, AIMCO issued 6,759,148
shares of AIMCO Common Stock, valued at $180.8 million, and paid $86.5
million in cash. The total cost of the purchase of NHP was $349.5 million.
In June 1997, AIMCO purchased a group of companies (the "NHP Real
Estate Companies") affiliated with NHP that hold general and limited
partnership interests in partnerships (the "NHP Partnerships") that own 534
conventional and affordable multifamily apartment properties (the "NHP
Properties") containing 87,659 units, a captive insurance subsidiary and
certain related assets (the "NHP Real Estate Acquisition"). AIMCO paid
aggregate consideration of $54.8 million in cash and warrants to purchase
399,999 shares of AIMCO Common Stock at an exercise price of $36.00 per
share. AIMCO engaged in a reorganization (the "NHP Real Estate
Reorganization") of its interests in the NHP Real Estate Companies, which
will result in certain of the assets of the NHP Real Estate Companies being
owned by a limited partnership (the "Unconsolidated Partnership") in which
AIMCO Properties, L.P. (the "AIMCO Operating Partnership") will hold a 99%
limited partner interest and certain directors and officers of AIMCO will,
directly or indirectly, hold a 1% general partner interest.
Immediately following the Merger, in order to satisfy certain
requirements of the Internal Revenue Code (the "Code") applicable to AIMCO's
status as a REIT, AIMCO engaged in a reorganization (the "NHP
Reorganization") of the assets and operations of NHP that resulted in the
Master Property Management Agreement being terminated and NHP's operations
being conducted through corporations (the "Unconsolidated Subsidiaries") in
which the AIMCO Operating Partnership holds non-voting preferred stock that
represents a 95% economic interest, and certain officers and/or directors of
AIMCO hold, directly or indirectly, all of the voting common stock,
representing a 5% economic interest. As a result of the controlling
ownership interest in the Unconsolidated Subsidiaries held by others, AIMCO
accounts for its interest in the Unconsolidated Subsidiaries on the equity
method.
Also during 1997, AIMCO (i) acquired (a) 45 properties for
aggregate purchase consideration of $467.3 million, of which $55.9 million
was paid in the form of 1.9
<PAGE>
million limited partnership units ("OP Units") in the AIMCO Operating
Partnership (b) paid $34.2 million in cash and issued OP Units valued at $7.3
million in connection with the acquisition of partnership interests through
tender offers in certain partnerships ((a) and (b) together are the "1997
Property Acquisitions") and (c) paid $19.9 million to acquire 886,600 shares
of common stock of Ambassador Apartments, Inc. (collectively, the "1997
Acquisitions"); (ii) sold (a) approximately 16,367,000 shares of AIMCO Common
Stock for aggregate net proceeds of $513.4 million; (b) 750,000 shares of
Class B Preferred Stock for net proceeds of $75 million; and (c) 2,400,000
shares of Class C 9% Cumulative Preferred Stock for net proceeds of $58.1
million (collectively, the "1997 Stock Offerings"); and (iii) sold five real
estate properties (the "1997 Dispositions").
In February 1998, AIMCO sold 4,200,000 shares of Class D 8.75%
Cumulative Preferred Stock for net proceeds of $101.5 million (the "1998
Stock Offering").
<PAGE>
PRO FORMA FINANCIAL INFORMATION (COMPLETED TRANSACTIONS)
The following Pro Forma Consolidated Balance Sheet (Completed
Transactions) of AIMCO as of December 31, 1997 has been prepared as if the
1998 Stock Offering had occurred as of December 31, 1997.
The following Pro Forma Consolidated Statement of Operations
(Completed Transactions) of AIMCO for the year ended December 31, 1997 has
been prepared as if each of the following transactions had occurred as of
January 1, 1997: (i) the 1997 Acquisitions; (ii) the 1997 Stock Offerings;
(iii) the 1997 Dispositions; (iv) the NHP Real Estate Acquisition; (v) the
NHP Real Estate Reorganization; (vi) the NHP Stock Purchase; (vii) the
Merger; (viii) the NHP Reorganization; and (ix) the 1998 Stock Offering.
The following Pro Forma Financial Information (Completed
Transactions) is based, in part, on the following historical financial
statements, which have been previously filed by AIMCO: (i) the audited
Consolidated Financial Statements of AIMCO for the year ended December 31,
1997; (ii) the unaudited Consolidated Financial Statements of NHP for the
nine months ended September 30, 1997; (iii) the unaudited Combined Financial
Statements of the NHP Real Estate Companies for the three months ended March
31, 1997; (iv) the unaudited Financial Statements of NHP Southwest Partners,
L.P. for the three months ended March 31, 1997; (v) the unaudited Combined
Financial Statements of the NHP New LP Entities for the three months ended
March 31, 1997; (vi) the unaudited Combined Financial Statements of the NHP
Borrower Entities for the three months ended March 31, 1997; (vii) the
unaudited Historical Summaries of Gross Income and Certain Expenses of The
Bay Club at Aventura for the three months ended March 31, 1997; (viii) the
unaudited Historical Summary of Gross Income and Direct Operating Expenses of
Morton Towers for the six months ended June 30, 1997; (ix) the unaudited
Combined Statement of Revenues and Certain Expenses of the Thirty-Five
Acquisition Properties for the six months ended June 30, 1997; (x) the
unaudited Statement of Revenues and Certain Expenses of First Alexandria
Associates, a Limited Partnership for the nine months ended September 30,
1997; (xi) the unaudited Statement of Revenues and Certain Expenses of
Country Lakes Associates Two, a Limited Partnership for the nine months ended
September 30, 1997; (xii) the unaudited Statement of Revenues and Certain
Expenses of Point West Limited Partnership for the nine months ended
September 30, 1997; and (xiii) the unaudited Statement of Revenues and
Certain Expenses for The Oak Park Partnership for the nine months ended
September 30, 1997. The following Pro Forma Financial Information (Completed
Transactions) should be read in conjunction with such financial statements
and the notes thereto. In the opinion of AIMCO's management, all material
adjustments necessary to reflect the effects of these transactions have been
made.
The unaudited Pro Forma Financial Information (Completed
Transactions) has been prepared using the purchase method of accounting
whereby the assets and liabilities of NHP, the NHP Real Estate Companies and
the 1997 Acquisitions are adjusted to estimated fair value, based upon
preliminary estimates, which are subject to change as additional information
is obtained. The allocations of purchase costs are subject to final
determination based upon estimates and other evaluations of fair value.
Therefore, the allocations reflected in the following unaudited Pro Forma
Financial Information (Completed Transactions) may differ from the amounts
ultimately determined.
<PAGE>
The following unaudited Pro Forma Financial Information (Completed
Transactions) is presented for informational purposes only and is not
necessarily indicative of the financial position or results of operations of
AIMCO that would have occurred if such transactions had been completed on the
dates indicated, nor does it purport to be indicative of future financial
positions or results of operations. In the opinion of AIMCO's management,
all material adjustments necessary to reflect the effects of these
transactions have been made.
<PAGE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (COMPLETED TRANSACTIONS)
As of December 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
COMPLETED
TRANSACTIONS
COMPLETED PRO
HISTORICAL (A) TRANSACTIONS (B) FORMA
-------------- ---------------- --------------
<S> <C> <C> <C>
ASSETS
Real estate $1,503,922 $ - $1,503,922
Property held for sale 6,284 - 6,284
Investments in securities 22,144 - 22,144
Investments in and notes receivable from
unconsolidated subsidiaries 84,459 - 84,459(C)
Investments in and notes receivable from
unconsolidated real estate partnerships 212,150 - 212,150
Cash and cash equivalents 37,088 48,393 85,481
Restricted cash 24,229 - 24,229
Accounts receivable 28,656 - 28,656
Deferred financing costs 12,793 - 12,793
Goodwill 125,239 - 125,239
Other assets 43,546 - 43,546
--------------- ---------------- ---------------
$2,100,510 $ 48,393 $2,148,903
--------------- ---------------- ---------------
--------------- ---------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured notes payable $ 681,421 $ - $ 681,421
Secured tax-exempt bond financing 74,010 - 74,010
Secured short term financing 53,099 (53,099) -
Unsecured short-term financing - - -
Acconnts payable, accrued and other
liabilities 88,170 - 88,170
Security deposits and deferred income 10,213 - 10,213
--------------- ---------------- ---------------
906,913 (53,099) 853,814
Minority interest in other partnerships 36,335 - 36,335
Minority interest in Operating Partnership 111,962 - 111,962
Class A common stock, $.01 par value 403 - 403
Class B common stock, $.01 par value 2 - 2
Non-voting preferred stock, $.01 par value - - -
Class B Cumulative Convertible Preferred
Stock, $.01 par value 75,000 - 75,000
Class C Cumulative Preferred Stock
$.01 par value 60,000 - 60,000
Class D Cumulative Preferred Stock 105,000 105,000
$.01 par value
Additional paid in capital 977,601 (3,508) 974,093
Notes receivable on common stock
purchases (35,095) - (35,095)
Distributions in excess of earnings (30,928) - (30,928)
Unrealized gain on investments (1,683) - (1,683)
--------------- ---------------- ---------------
1,045,300 101,492 1,146,792
--------------- ---------------- ---------------
$2,100,510 $ 48,393 $2,148,903
--------------- ---------------- ---------------
--------------- ---------------- ---------------
</TABLE>
<PAGE>
(A) Represents the audited historical consolidated financial position of
AIMCO as of December 31, 1997, as reported in AIMCO's Annual Report on
Form 10-K.
(B) Represents adjustments to reflect the 1998 Stock Offering.
(C) Amount represents notes receivable from the Unconsolidated Subsidiaries of
$50,000 and equity in the Unconsolidated Subsidiaries of $34,459. The
combined historical balance sheet of the Unconsolidated Subsidiaries
as of December 31, 1997 is presented below. There were no pro forma
adjustments to the balance sheet as of December 31, 1997.
<TABLE>
<CAPTION>
HISTORICAL
-------------
<S> <C>
ASSETS
Real estate $ 23,317
Cash and cash equivalents 5,261
Restricted cash 1,896
Management contracts 51,441
Accounts receivable 5,627
Deferred financing costs 477
Goodwill 43,523
Other assets 13,313
-------------
$ 144,855
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured notes payable $ 25,301
Secured short-term financing 50,000
Accounts payable, accrued and other
liabilities 20,978
Security deposits and prepaid rents 3,013
Deferred tax liability 9,178
-------------
108,470
Common stock 2,071
Preferred stock 34,459
Retained earnings (26)
Notes receivable on common stock
purchases (119)
-------------
36,385
-------------
$ 144,855
-------------
-------------
</TABLE>
<PAGE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(COMPLETED TRANSACTIONS)
For the Year Ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
NHP NHP PUBLIC
COMPLETED REAL ESTATE COMPANY
HISTORICAL (A) TRANSACTIONS (B) PURCHASE (C) HISTORICAL (D)
-------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Rental and other property revenues $ 193,006 $ 84,508 (G) $ 6,660 (K) $ 16,842
Property operating expenses (76,168) (42,165)(G) (2,941)(K) (8,411)
Owned property management expense (6,620) (3,100)(G) (282)(K) (862)
--------- -------- ------- --------
Income from property operations before
depreciation 110,218 39,243 3,437 7,569
Depreciation (37,741) (16,387)(G) (1,414)(L) (2,527)
--------- -------- ------- --------
Income from property operations 72,477 22,856 2,023 5,042
--------- -------- ------- --------
Management fees and other income 13,937 - 1,405 (M) 72,176
Management and other expenses (9,910) - (2,263)(N) (35,267)
Corporate overhead allocation (588) - - -
Depreciation and amortization (1,401) - - (9,111)
--------- -------- ------- --------
Income from service company business 2,038 - (858) 27,798
Minority interest in service company
business (10) - - -
--------- -------- ------- --------
Company's share of income from service
company business 2,028 - (858) 27,798
--------- -------- ------- --------
General and administrative expenses (5,396) - - (16,266)
Interest expense (51,385) (4,237)(H) (5,082)(O) (10,685)
Interest income 8,676 - 540 (K) 1,963
Minority interest in other partnerships 1,008 779 (I) 16 (K) -
Equity in losses of unconsolidated
partnerships (1,798) (122)(J) (3,905)(P) -
Equity in earnings of unconsolidated
subsidiaries 4,636 - - -
--------- -------- ------- --------
Income from operations 30,246 19,276 (7,266) 7,852
Income tax provision - - - (3,502)
Gain on dispositions of property 2,720 (2,720) - -
--------- -------- ------- --------
Income before extraordinary item and
minority interest in
Operating Partnership 32,966 16,556 (7,266) 4,350
Extraordinary item - early extinguishment
of debt (269) 269 - -
--------- -------- ------- --------
Income before minority interest in
Operating Partnership 32,697 16,825 (7,266) 4,350
Minority interest in Operating Partnership (4,064) 184 (CC) (1,660)(CC) -
--------- -------- ------- --------
Net Income 28,633 17,009 (8,926) 4,350
Income attributable to preferred shareholders 2,315 17,617 - -
--------- -------- ------- --------
--------- -------- ------- --------
Income attributable to common shareholders $ 26,318 $ (608) $(8,926) $ 4,350
--------- -------- ------- --------
--------- -------- ------- --------
Basic earnings per common share $ 1.09
---------
---------
Diluted earnings per common share $ 1.08
---------
---------
Weighted average number of common shares
outstanding 24,055
---------
---------
Weighted average number of common shares
and commmon share equivalents outstanding 24,436
---------
---------
<CAPTION>
COMPLETED
NHP PUBLIC TRANSACTIONS
PURCHASE NHP PRO
ADJUSTMENTS (E) REORGANIZATION (F) FORMA
--------------- ------------------ ----------
<S> <C> <C> <C>
Rental and other property revenues $ - $(16,842)(W) $ 284,174
Property operating expenses - 8,411 (W) (121,274)
Owned property management expense - 862 (W) (10,002)
------- -------- ---------
Income from property operations before
depreciation - (7,569) 152,898
Depreciation (693)(Q) 3,220 (W) (55,542)
------- -------- ---------
Income from property operations (693) (4,349) 97,356
------- -------- ---------
Management fees and other income - (65,768)(X) 21,750
Management and other expenses - 32,136 (X) (15,304)
Corporate overhead allocation - - (588)
Amortization (4,432)(R) 7,743 (Y) (7,201)
------- -------- ---------
Income from service company business (4,432) (25,889) (1,343)
Minority interest in service company
business - - (10)
------- -------- ---------
Company's share of income from service
company business (4,432) (25,889) (1,353)
------- -------- ---------
General and administrative expenses 8,668 (S) 6,573 (Y) (6,421)
Interest expense - 10,305 (Z) (61,084)(DD)
Interest income - (603)(AA) 10,576
Minority interest in other partnerships - - 1,803
Equity in losses of unconsolidated
partnerships (4,631)(T) (6) (10,462)
Equity in earnings of unconsolidated
subsidiaries (4,636)(U) 10,426 (BB) 10,426 (FF)
------- -------- ---------
Income from operations (5,724) (3,543) 40,841
Income tax provision 3,502 (V)
Gain on dispositions of property - -
------- -------- ---------
Income before extraordinary item and
minority interest in
Operating Partnership (2,222) (3,543) 40,841
Extraordinary item - early extinguishment
of debt - -
------- -------- ---------
Income before minority interest in
Operating Partnership (2,222) (3,543) 40,841
Minority interest in Operating Partnership 3,088 (CC) (2,452)
------- -------- ---------
Net Income $(2,222) $ (455) $ 38,389 (DD)
------- -------- ---------
------- -------- ---------
Income attributable to preferred shareholders $ - $ - $ 19,932 (EE)
------- -------- ---------
Income attributable to common shareholders $(2,222) $ (455) $ 18,457 (DD)
------- -------- ---------
------- -------- ---------
Basic earnings per common share $ 0.46 (DD)
---------
---------
Diluted earnings per common share $ 0.46 (DD)
---------
---------
Weighted average number of common shares outstanding 40,106
---------
---------
Weighted average number of common shares and common share
equivalents outstanding 40,487
---------
---------
</TABLE>
(A) Represents AIMCO's audited consolidated results of operations for
the year ended December 31, 1997.
(B) Represents adjustments to reflect the following as if they had
occurred on January 1, 1997: (i) the 1997 Acquisitions; (ii) the
1997 Stock Offerings; (iii) the 1997 Dispositions; and (iv) the 1998
Stock Offering.
(C) Represents the adjustment to record activity from January 1, 1997 to
the date of acquisition, as if the acquisition of the NHP Real Estate
Companies had occurred on January 1, 1997. The historical financial
statements of the NHP Real Estate Companies consolidate certain real
estate partnerships in which they have an interest that will be
presented on the equity method by AIMCO as a result of the NHP Real
Estate Reorganization. In addition, represents adjustments to record
additional depreciation and amortization related to the increased
basis in the assets of the NHP Real Estate Companies as a result of
the allocation of the purchase price of the NHP Real Estate Companies
and additional interest expense incurred
<PAGE>
in connection with borrowings incurred by AIMCO to consummate the NHP
Real Estate Acquisition.
(D) Represents the unaudited consolidated results of operations of NHP for
the period from January 1, 1997 through December 8, 1997 (date of
Merger).
(E) Represents the following adjustments occurring as a result of the
Merger: (i) the reduction in personnel costs, primarily severance
costs, pursuant to a restructuring plan; (ii) the incremental
depreciation of the purchase price adjustment related to real
estate; (iii) the incremental amortization of the purchase price
adjustment related to the management contracts, furniture, fixtures
and equipment, and goodwill; (iv) the reversal of equity in
earnings in NHP during the pre-merger period when AIMCO held a
47.62% interest in NHP; and (v) the amortization of the increased
basis in investments in real estate partnerships based on the
purchase price adjustment related to the real estate and an
estimated average life of 20 years.
(F) Represents adjustments related to the NHP Reorganization, whereby AIMCO
will contribute or sell to the Unconsolidated Subsidiaries and the
Unconsolidated Partnership: (i) certain assets and liabilities of
NHP, primarily related to the management operations and other
businesses owned by NHP and (ii) 12 real estate properties
containing 2,905 apartment units. The adjustments represent (i) the
related revenues and expenses primarily related to the management
operations and other businesses owned by NHP and (ii) the
historical results of operations of such real estate properties and
interests in such real estate partnerships contributed, with
additional depreciation and amortization recorded related to
AIMCO's new basis resulting from the allocation of the combined
purchase price of NHP and the NHP Real Estate Companies.
(G) Represents adjustments to reflect the 1997 Property Acquisitions, less
the 1997 Dispositions as if they had occurred on January 1, 1997.
These pro forma operating results are based on historical results
of the properties, except for depreciation, which is based on
AIMCO's investment in the properties.
These adjustments are as follows:
<TABLE>
<CAPTION>
1997 Property
Acquisitions 1997 Dispositions
------------- -----------------
<S> <C> <C>
Rental and other property
revenues $ 88,589 $(4,081)
Property operating expense (44,109) 1,944
Owned property management expense (3,233) 133
Depreciation (16,839) 452
</TABLE>
<PAGE>
(H) Represents adjustments to interest expense for the following:
<TABLE>
<S> <C>
Borrowings on AIMCO's Credit Facility and other loans and
mortgages assumed in connection with the 1997 Property
Acquisitions $(29,427)
Repayments on AIMCO's Credit Facility and other indebtedness
with proceeds from the 1997 Dispositions, the 1997 Stock
Offerings, and the 1998 Stock Offering 23,301
Repayments on AIMCO's Credit Facility with proceeds from a
dividend received from one of the Unconsolidated
Subsidiaries 1,889
--------
$(4,237)
--------
--------
</TABLE>
(I) Represents income related to limited partners in consolidated
partnerships acquired in connection with the 1997 Property
Acquisitions.
(J) Represents the reduction of AIMCO's earnings in unconsolidated
partnerships as a result of the consolidation of additional partnerships
resulting from additional ownership acquired through tender offers.
(K) Represents adjustments to reflect the acquisition of the NHP Real
Estate Companies and the corresponding historical results of
operations as if they had occurred on January 1, 1997.
(L) Represents incremental depreciation related to the consolidated real
estate assets purchased from the NHP Real Estate Companies.
Buildings and improvements are depreciated on the straight-line
method over a period of 30 years, and furniture and fixtures are
depreciated on the straight-line method over a period of 5 years.
(M) Represents the adjustment to record the revenues from ancillary
businesses purchased from the NHP Real Estate Companies as if the
acquisition had occurred on January 1, 1997.
(N) Represents $4,878 related to the adjustment to record the expenses
from ancillary businesses purchased from the NHP Real Estate
Companies as if the acquisition had occurred on January 1, 1997,
less $2,615 related to a reduction in personnel costs pursuant to a
restructuring plan, approved by AIMCO senior management, assuming
that the acquisition of the NHP Real Estate Companies had occurred
on January 1, 1997 and that the restructuring plan was completed on
January 1, 1997. The restructuring plan specifically identifies all
significant actions to be taken to complete the restructuring plan,
including the reduction of personnel, job functions, location and
the date of completion.
(O) Represents adjustments in the amount of $3,391 to reflect the
acquisition of the NHP Real Estate Companies and the corresponding
historical results of operations as if they had occurred on January
1, 1997, as well as the increase in interest expense in the amount
of $1,691 related to borrowings on AIMCO's Credit Facility of
$55,807 to finance the NHP Real Estate Acquisition.
<PAGE>
(P) Represents adjustments in the amount of $2,432 to reflect the
acquisition of the NHP Real Estate Companies and the corresponding
historical results of operations as if they had occurred on January
1, 1997, as well as amortization of $1,473 related to the increased
basis in investment in real estate partnerships, as a result of
the allocation of the purchase price of the NHP Real Estate
Companies, based on an estimated average life of 20 years.
(Q) Represents incremental depreciation related to the real estate assets
purchased from NHP. Buildings and improvements are depreciated on
the straight-line method over a period of 20 years, and furniture
and fixtures are depreciated on the straight-line method over a
period of 5 years.
(R) Represents incremental depreciation and amortization of the tangible
and intangible assets related to the property management and other
business operated by the Unconsolidated Subsidiaries, based on
AIMCO's new basis as adjusted by the allocation of the combined
purchase price of NHP including amortization of management
contracts of $3,782, depreciation of furniture, fixtures and
equipment of $2,018 and amortization of goodwill of $7,743, less
NHP's historical depreciation and amortization of $9,111.
Management contracts are amortized using the straight-line method
over the weighted average life of the contracts estimated to be
approximately 15 years. Furniture, fixtures and equipment are
depreciated using the straight-line method over the estimated life
of 3 years. Goodwill is amortized using the straight-line method
over 20 years.
(S) Represents a reduction in personnel costs, primarily severance costs,
pursuant to a restructuring plan, approved by AIMCO senior
management, specifically identifying all significant actions to be
taken to complete the restructuring plan, assuming that the Merger
had occurred on January 1, 1997 and that the restructuring plan was
completed on January 1, 1997.
(T) Represents adjustment for amortization of the increased basis in
investments in real estate partnerships, as a result of the
allocation of the combined purchase price of NHP and the NHP Real
Estate Companies, based on an estimated average life of 20 years.
(U) Represents the reversal of equity in earnings in NHP during the
pre-merger period when AIMCO held a 47.62% interest in NHP, as a
result of AIMCO's acquisition of 100% of the NHP Common Stock.
(V) Represents the reversal of NHP's income tax provision due to the
restructuring of the management business to the Unconsolidated
Subsidiaries.
(W) Represents the contribution of NHP's 12 real estate properties
containing 2,905 apartment units to the Unconsolidated Partnership
pursuant to the NHP Reorganization.
(X) Represents the historical income and expenses associated with certain
assets and liabilities of NHP that were contributed or sold to the
Unconsolidated
<PAGE>
Subsidiaries, primarily related to the management operations and
other businesses owned by NHP.
(Y) Represents the stepped-up amortization and depreciation of certain
management contracts and other assets of NHP that will be
contributed or sold to the Unconsolidated Subsidiaries, primarily
related to the management operations and other businesses owned by
NHP.
(Z) Represents interest expense of $6,020 related to the contribution of
NHP's 12 real estate properties containing 2,905 apartment units to
the Unconsolidated Partnership and interest expense of $4,285
related to the certain assets and liabilities that will be
contributed or sold to the Unconsolidated Subsidiaries pursuant to
the NHP Reorganization.
(AA) Represents the interest income of $5,000 earned on notes payable of
$50,000 to AIMCO issued as consideration for certain assets and
liabilities sold to the Unconsolidated Subsidiaries by AIMCO, net
of the elimination of AIMCO's share of the related interest expense
of $4,750 reflected in the equity in earnings of the Unconsolidated
Subsidiaries operating results, offset by $853 in interest income
primarily related to the management operations and other businesses
owned by NHP contributed or sold to the Unconsolidated Subsidiaries
pursuant to the NHP Reorganization.
(BB) Represents AIMCO's equity in earnings of the Unconsolidated
Subsidiaries.
(CC) Represents adjustments to minority interest in the Operating
Partnership assuming the 1997 Property Acquisitions, the 1997 Stock
Offerings, the 1997 Dispositions, the NHP Real Estate Acquisition, the
NHP Stock Purchase, the Merger, and the 1998 Stock Offering had all
occurred as of January 1, 1997. On a pro forma basis, without giving
effect to the NHP Merger or the NHP Reorganization, as of December 31,
1997, the minority interest percentage is approximately 13.2%. On a
pro forma basis, giving effect to the NHP Merger and the NHP
Reorganization, as of December 31, 1997, the minority interest
percentage is approximately 11.7%.
(DD) The following table presents the net impact to pro forma net income
applicable to holders of AIMCO Common Stock and net income per
share of AIMCO Common Stock assuming the interest rate per annum
increases by 0.25%:
<TABLE>
<S> <C>
Increase in interest expense $ 33
-------
-------
Income before minority interest in Operating
Partnership 40,808
Minority interest in Operating Partnership (2,448)
-------
Net income $38,360
-------
-------
Net income attributable to common stockholders $18,428
-------
-------
Basic net income common per share $0.46
-------
-------
Diluted net income common per share $0.46
-------
-------
</TABLE>
<PAGE>
(EE) Represents the net income allocated to holders of the AIMCO Class B
Preferred Stock, the AIMCO Class C 9% Cumulative Preferred Stock,
and the AIMCO Class D 8.75% Cumulative Preferred Stock as if these
stock offerings had occurred as of January 1, 1997.
(FF) Represents AIMCO's equity in earnings in the Unconsolidated
Subsidiaries of $5,676, plus the elimination of intercompany
interest expense of $4,750. The combined Pro Forma Statement of
Operations of the Unconsolidated Subsidiaries for the year ended
December 31, 1997 is presented below, which represents the effects
of the NHP Merger and the NHP Reorganization as if these
transactions had occurred as of January 1, 1997.
<PAGE>
<TABLE>
<CAPTION>
REORGANIZATION
HISTORICAL (I) ADJUSTMENTS (II) PRO FORMA
--------------- ---------------- ---------
<S> <C> <C> <C>
Rental and other property revenues $ 6,194 $ 6,371 (iii) $ 12,565
Property operating expenses (3,355) (3,531) (iii) (6,886)
Owned property management expense (147) (478) (iii) (625)
------- ------- --------
Income from property operations before
depreciation 2,692 2,362 5,054
Depreciation (1,038) (767) (iii) (1,805)
------- ------- --------
Income from property operations 1,654 1,595 3,249
------- ------- --------
Management fees and other income 23,776 41,992 (iv) 65,768
Management and other expenses (11,733) (20,403) (iv) (32,136)
Depreciation and amortization (3,726) (4,017) (iv) (7,743)
------- ------- --------
Income from service company business 8,317 17,572 25,889
------- ------- --------
General and administrative expense - (6,573) (iv) (6,573)
Interest expense (6,058) (5,849) (v) (11,907)
Interest income 1,001 (148) (iv) 853
Minority interest in other partnerships (2,819) 2,198 (vii) (621)
Equity in losses of unconsolidated partnerships (1,028) 1,028 (vi) -
Equity in earnings of unconsolidated subsidiaries 2,943 (2,943) (vi) -
------- ------- --------
Income from operations 4,010 6,880 10,890
Income tax provision (1,902) (3,013) (viii) (4,915)
------- ------- --------
Income before discontinued operations 2,108 3,867 5,975
Discontinued operations 206 (206) (vi) -
------- ------- --------
Net income $ 2,314 $ 3,661 $ 5,975
------- ------- --------
------- ------- --------
Income attributable to preferred shareholders $ 2,198 $ 3,478 $ 5,676
------- ------- --------
------- ------- --------
Income attributable to common shareholders $ 116 $ 183 $ 299
------- ------- --------
------- ------- --------
</TABLE>
(i) Represents the historical results of operations of the
Unconsolidated Subsidiaries for the year ended December 31, 1997.
(ii) Represents adjustments related to the NHP Reorganization, which
includes the sale or contribution of 14 properties containing 2,725
apartment units from the unconsolidated partnerships to the
Unconsolidated Subsidiaries, as well as the sale or contribution of 12
properties containing 2,905 apartment units from the Unconsolidated
Subsidiaries to the unconsolidated partnerships.
<PAGE>
(iii) Represents adjustments for the historical results of operations of
the 14 real estate properties contributed or sold to the
Unconsolidated Subsidiaries, offset by the historical results of
operations of the 12 real estate properties contributed or sold to the
Unconsolidated Partnership, with additional depreciation recorded
related to AIMCO's new basis resulting from the allocation of purchase
price of NHP and the NHP Real Estate Companies.
(iv) Represents adjustments to reflect income and expenses associated with
certain assets and liabilities of NHP contributed or sold to the
Unconsolidated Subsidiaries.
(v) Represents adjustments of $6,058 to reverse the historical interest
expense of the Unconsolidated Subsidiaries, which resulted from its
original purchase of NHP Common Stock, offset by $2,622 related to the
contribution or sale of the 14 real estate properties, $4,285 related
to assets and liabilities transferred from NHP to the Unconsolidated
Subsidiaries and $5,000 related to a note payable to AIMCO.
(vi) Represents the reversal of the historical equity pickup of NHP for the
period in which NHP was not consolidated by the Unconsolidated
Subsidiaries.
(vii) Represents the minority interest in the operations of the 14 real
estate properties.
(viii) Represents the estimated Federal and state tax provisions, which are
calculated on the operating results of the Unconsolidated Subsidiaries,
excluding amortization of goodwill which is not deductible for tax
purposes.
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
(AMBASSADOR MERGER)
INTRODUCTION
On December 23, 1997, AIMCO and Ambassador entered into, and as of March
11, 1998, supplemented, the Merger Agreement. Pursuant to the Merger
Agreement, Ambassador will be merged with and into AIMCO with AIMCO as the
surviving corporation. The Merger will become effective at the Effective
Time. Upon consummation of the Merger, each outstanding share of Ambassador
Common Stock, other than Ambassador Common Stock held by Ambassador or AIMCO,
will be converted into the right to receive that number of shares of AIMCO
Common Stock equal to the quotient (rounded to the nearest 1/1000) (the
"Conversation Ratio") determined by dividing $21.00 by the AIMCO Index Price
(as defined below). The term "AIMCO Index Price" means the aggregate of the
average of the high and low sales prices of AIMCO Common Stock, as reported
on the NYSE, on each of the twenty consecutive NYSE trading days ending on
the fifth NYSE trading day immediately preceding the Effective Time, divided
by 20. Notwithstanding the foregoing, if the Conversion Ratio calculated
pursuant to the foregoing is greater than 0.583, then, at AIMCO's option, the
Conversion Ratio to be used shall be either the Conversion Ratio as
calculated pursuant to the foregoing or 0.583 (so long as the merger would
continue to qualify as a reorganization under Section 368(a) of the Code).
If AIMCO opts for the Conversion Ratio to equal 0.583, then, in addition to
0.583 shares of AIMCO Common Stock, AIMCO will pay to each holder of
Ambassador Common Stock, for each share of Ambassador Common Stock held by
such shareholder, an amount in cash equal to (i) $21.00 minus (ii) the
product of the AIMCO Index Price and 0.583. In lieu of any fractional shares
of AIMCO Common Stock, each holder of Ambassador Common Stock who would
otherwise be entitled to receive such fractional shares will be paid cash
equal to the product of such fractional shares and the AIMCO Index Price. The
Merger is subject to a number of conditions, including the approval of the
stockholders of Ambassador.
PRO FORMA FINANCIAL INFORMATION (AMBASSADOR MERGER)
The following Pro Forma Consolidated Balance Sheet (Ambassador
Merger) of AIMCO as of December 31, 1997 has been prepared as if each of
the following transactions had occurred as of December 31, 1997: (i) the
sale of 4,200,000 shares of Class D 8.75% Cumulative Preferred Stock for net
proceeds of $101.5 million (the "1998 Stock Offering") and (ii) the
Ambassador Merger.
The following Pro Forma Consolidated Statement of Operations
(Ambassador Merger) of AIMCO for the year ended December 31, 1997 has been
prepared as if each of the following transactions had occurred as of January
1, 1997: (i) the acquisition of an aggregate of 6,930,122 shares of common
stock ("NHP Common Stock") of NHP ("the NHP Stock Purchase"); (ii) the
purchase of a group of companies (the "NHP Real Estate Companies")
affiliated with NHP that hold general and limited partnership interests in
partnerships (the "NHP Partnerships") that own 534 conventional and
affordable multifamily apartment properties (the "NHP Properties") containing
87,659 units, a captive insurance subsidiary and certain related assets (the
"NHP Real Estate Acquisition"); (iii) the acquisition of (a) 45 properties
for aggregate purchase consideration of $467.3 million, of which $55.9
million was paid in the form of 1.9 million limited partnership units ("OP
Units") in the AIMCO Operating Partnership (b) partnership interests through
tender offers in certain partnerships for consideration of $34.2 million in
cash and OP Units valued at $7.3 million ((a) and (b) together are the "1997
Property Acquisitions") and (c) 886,600 shares of common stock of Ambassador
Apartments, Inc. for consideration of $19.9 million (collectively, the "1997
Acquisitions"); (iv) the sale of (a) approximately 16,367,000 shares of AIMCO
Common
<PAGE>
Stock for aggregate net proceeds of $513.4 million; (b) 750,000 shares of
Class B Preferred Stock for net proceeds of $75 million; and (c) 2,400,000
shares of Class C 9% Cumulative Preferred Stock for net proceeds of $58.1
million (collectively, the "1997 Stock Offerings"); (v) the sale of five real
estate properties (the "1997 Dispositions"); (vi) the 1998 Stock Offering;
and (vii) the Ambassador Merger.
The following Pro Forma Financial Information (Ambassador Merger)
is based, in part, on the following historical financial statements, which
have been previously filed by AIMCO or are incorporated by reference in this
Current Report on form 8-K: (i) the audited Consolidated Financial
Statements of AIMCO for the year ended December 31, 1997; (ii) the audited
Consolidated Financial Statements of Ambassador for the year ended December
31, 1997; (iii) the unaudited Consolidated Financial Statements of NHP for
the nine months ended September 30, 1997; (iv) the unaudited Combined
Financial Statements of the NHP Real Estate Companies for the three months
ended March 31, 1997; (v) the unaudited Financial Statements of NHP Southwest
Partners, L.P. for the three months ended March 31, 1997; (vi) the unaudited
Combined Financial Statements of the NHP New LP Entities for the three months
ended March 31, 1997; (vii) the unaudited Combined Financial Statements of
the NHP Borrower Entities for the three months ended March 31, 1997; (viii)
the unaudited Historical Summaries of Gross Income and Certain Expenses of
The Bay Club at Aventura for the three months ended March 31, 1997; (ix) the
unaudited Historical Summary of Gross Income and Direct Operating Expenses of
Morton Towers for the six months ended June 30, 1997; (x) the unaudited
Combined Statement of Revenues and Certain Expenses of the Thirty-Five
Acquisition Properties for the six months ended June 30, 1997; (xi) the
unaudited Statement of Revenues and Certain Expenses of First Alexandria
Associates, a Limited Partnership for the nine months ended September 30,
1997; (xii) the unaudited Statement of Revenues and Certain Expenses of
Country Lakes Associates Two, a Limited Partnership for the nine months ended
September 30, 1997; (xiii) the unaudited Statement of Revenues and Certain
Expenses of Point West Limited Partnership for the nine months ended
September 30, 1997; and (xiv) the unaudited Statement of Revenues and Certain
Expenses for The Oak Park Partnership for the nine months ended September 30,
1997. The following Pro Forma Financial Information (Ambassador Merger)
should be read in conjunction with such financial statements and the notes
thereto. In the opinion of AIMCO's management, all material adjustments
necessary to reflect the effects of these transactions have been made.
The unaudited Pro Forma Financial Information (Ambassador Merger)
has been prepared using the purchase method of accounting whereby the assets
and liabilities of Ambassador and NHP are adjusted to estimated fair value,
based upon preliminary estimates, which are subject to change as additional
information is obtained. The allocations of purchase costs are subject to
final determination based upon estimates and other evaluations of fair value.
Therefore, the allocations reflected in the following unaudited Pro Forma
Financial Information (Ambassador Merger) may differ from the amounts
ultimately determined.
The following unaudited Pro Forma Financial Information (Ambassador
Merger) is presented for informational purposes only and is not necessarily
indicative of the financial position or results of operations of AIMCO that
would have occurred if such transactions had been completed on the dates
indicated, nor does it purport to be indicative of future financial positions
or results of operations. In the opinion of AIMCO's management, all material
adjustments necessary to reflect the effects of these transactions have been
made.
<PAGE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (AMBASSADOR MERGER)
As of December 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
COMPLETED
TRANSACTIONS AMBASSADOR AMBASSADOR
FILED AMBASSADOR PURCHASE PRICE PRO
PRO FORMA (A) HISTORICAL (B) ALLOCATIONS (C) FORMA
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Real estate $1,503,922 $ 499,435 $ 169,387 (D) $2,172,744
Property held for sale 6,284 - - 6,284
Investments in securities 22,144 - (18,311) (E) 3,833
Investments in and notes receivable from
unconsolidated subsidiaries 84,459 - - 84,459 (P)
Investments in and notes receivable from
unconsolidated real estate partnerships 212,150 1,243 1,257 (F) 214,650
Cash and cash equivalents 85,481 4,448 (48,393) (G) 41,536
Restricted cash 24,229 30,838 - 55,067
Accounts receivable 28,656 1,586 - 30,242
Deferred financing costs 12,793 15,404 (412) (H) 27,785
Goodwill 125,239 - - 125,239
Other assets 43,546 4,222 (308) (I) 47,460
---------- ------------ ------------ ----------
$2,148,903 $ 557,176 $ 103,220 $2,809,299
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured notes payable $ 681,421 $ 37,292 $ - $ 718,713
Secured tax-exempt bond financing 74,010 313,097 - 387,107
Secured short-term financing - 35,250 (20,993) (J) 14,257
Unsecured short-term financing - 2,010 (2,010) (J) -
Accounts payable, accrued and other
liabilities 88,170 6,596 33,800 (C) 128,566
Security deposits and deferred income 10,213 2,480 - 12,693
---------- ------------ ------------ ----------
853,814 396,725 10,797 1,261,336
Minority interest in other partnerships 36,335 19,028 (19,028) (G) 36,335
Minority interest in Operating Partnership 111,962 9,243 9,559 (K) 130,764
Class A common stock, $.01 par value 403 106 (42) (L) 467
Class B common stock, $.01 par value 2 - - 2
Class A Senior Cumulative Covertible
Preferred Stock, $.01 par value - 24,132 (24,132) (M) -
Class B Cumulative Covertible Preferred
Stock, $.01 par value 75,000 - - 75,000
Class C Cumulative Preferred Stock,
$.01 par value 60,000 - - 60,000
Class D Cumulative Preferred Stock,
$.01 par value 105,000 - - 105,000
Additional paid in capital 974,093 147,414 85,024 (N) 1,206,531
Notes receivable on common stock
purchases (35,095) - - (35,095)
Distributions in excess of earnings (30,928) (39,472) 39,472 (O) (30,928)
Unrealized gain on investments (1,683) - 1,570 (E) (113)
---------- ------------ ------------ ----------
1,146,792 132,180 101,892 1,380,864
---------- ------------ ------------ ----------
$2,148,903 $ 557,176 $ 103,220 $2,809,299
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
</TABLE>
(A) Represents AIMCO's pro forma consolidated financial position before
giving credit to the Ambassador Merger.
(B) Represents the audited consolidated financial position of Ambassador
as of December 31, 1997.
<PAGE>
Certain reclassifications have been made to Ambassador's
historical balance sheet to conform to AIMCO's balance sheet
presentation.
(C) Represents adjustments to record the Ambassador Merger in accordance
with the purchase method of accounting, based upon the assumed
purchase price of $727,100 assuming a market value of $36.00 per
share of AIMCO's Common Stock, as follows:
<TABLE>
<S> <C>
Issuance of 6,422,871 shares of AIMCO Common Stock
based on the Conversion Ratio of 0.583 in exchange for
11,016,931 shares of Ambassador Common Stock, which
includes 1,351,351 shares of Ambassador Common Stock
resulting from the conversion of Ambassador Preferred
Stock....................................................... $ 231,223
Cost of 886,600 shares of Ambassador Common Stock in
August 1997................................................. 19,881
Issuance of 521,970 units of AIMCO Properties, L.P. based
on the Conversion Ratio of 0.583 in exchange for 895,318
units of Ambassador Apartments, L.P. ....................... 18,802
Consideration related to the conversion of Ambassador stock
options to AIMCO stock options.............................. 1,279
Assumption of Ambassador's liabilities.......................... 396,725
Redemption of limited partnership interests not owned by
Ambassador in Jupiter-I, L.P. and Jupiter-II, L.P........... 25,390
Ambassador Merger costs (see calculation below)................. 33,800
---------
$ 727,100
---------
---------
</TABLE>
The following is a calculation of the estimated fees and other
expenses related to the Ambassador Merger:
<TABLE>
<S> <C>
Transfer and prepayment fees.................................... $ 20,800
Expected change of control/noncompete costs..................... 6,100
Legal fees...................................................... 2,000
Investment banking fees......................................... 3,200
Other professional fees, including printing..................... 1,700
---------
$ 33,800
---------
---------
</TABLE>
(D) Represents the adjustment to record Ambassador's real estate assets,
net, to estimated fair value.
(E) Represents the elimination of AIMCO's previous investment in
Ambassador, which was marked-to-market as of December 31, 1997 in
accordance with the provisions of Statement of Financial
Accounting Standard No. 115, Accounting For Certain Investments In
Debt And Equity Securities.
<PAGE>
(F) Represents the adjustment to record Ambassador's investment in
unconsolidated partnerships to estimated fair value.
(G) Represents (i) repayment of $37,260 of Ambassador's revolving lines of
credit upon consummation of the Ambassador Merger according to the
terms of the Ambassador Merger Agreement, and (ii) partial redemption
of limited partnership interests not owned by Ambassador in Jupiter-I,
L.P. and Jupiter-II, L.P. in the amount of $11,133 (the remaining
distribution of $14,257 was funded through AIMCO's Credit Facility)
representing the limited partners' initial contributions of $23,000,
less previous distributions of $3,972 (together, represents current
balance of $19,028) plus a preferred return of $6,362 (which includes
amounts previously distributed).
(H) Represents the elimination of the deferred loan costs related to
Ambassador's revolving lines of credit in connection with the repayment
upon consummation of the Ambassador Merger.
(I) Represents the elimination of deferred lease costs in connection with
the Ambassador Merger.
(J) Represents payoff of Ambassador's revolving lines of credit of $35,250,
offset by borrowings of $14,257 to redeem the remaining limited
partnership interests not owned by Ambassador of Jupiter-I, L.P. and
Jupiter-II, L.P.
(K) Represents the estimated increase in Minority Interest in Operating
Partnership based upon AIMCO's purchase price per limited partnership
interest in Ambassador Apartments, L.P. ("Ambassador OP Unit") and the
adjustment to eliminate the basis of Ambassador's Minority Interest in
Operating Partnership:
<TABLE>
<S> <C>
Purchase price of minority interest in Ambassador
Operating Partnership (see Note C)........................ $ 18,802
Less: historical basis of minority interest in Ambassador
Operating Partnership..................................... (9,243)
---------
Adjustment to record fair value of limited partnership
Interests in AIMCO Operating Partnership
("AIMCO OP Units") issued in exchange for
Ambassador OP Units....................................... $ 9,559
---------
---------
</TABLE>
(L) Represents the elimination of Ambassador's Common Stock at $.01 par
value ($106) net of the issuance of AIMCO Common Stock at $.01 par
value ($64) (see Note N).
(M) Represents the elimination of Ambassador's Preferred Stock as a result
of its redemption or conversion in connection with the Ambassador
Merger.
(N) Represents the increase to paid-in capital to reflect the following:
<TABLE>
<S> <C>
Issuance of 6,422,871 shares of AIMCO Common Stock at
<PAGE>
$36.00 per share............................................ $ 231,223
Less: Par value of AIMCO Common Stock Issued (64)
Ambassador's historical paid-in-capital..................... (147,414)
Consideration related to the conversion of Ambassador
stock options to AIMCO stock options........................ 1,279
---------
$ 85,024
---------
---------
</TABLE>
(O) Represents the elimination of Ambassador's distributions in excess of
accumulated earnings, as a result of the Ambassador Merger.
(P) Amount represents notes receivable from the unconsolidated
subsidiaries of $50,000 and equity in the unconsolidated subsidiaries
of $34,459. The combined historical balance sheet of the
unconsolidated subsidiaries as of December 31, 1997 is presented
below. There were no pro forma adjustments to the balance sheet as of
December 31, 1997.
<TABLE>
<CAPTION>
COMPLETED TRANSACTIONS
PRO FORMA
-------------------
<S> <C>
ASSETS
Real estate $ 23,317
Cash and cash equivalents 5,261
Restricted cash 1,896
Management contracts 51,441
Accounts receivable 5,627
Deferred financing costs 477
Goodwill 43,523
Other assets 13,313
--------
$144,855
--------
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured notes payable $ 25,301
Secured short-term financing 50,000
Accounts payable, accrued and other
liabilities 20,978
Security deposits and deferred income 3,013
Deferred tax liability 9,178
--------
108,470
Common stock 2,071
Preferred stock 34,459
Retained earnings (26)
Notes receivable on common stock
purchases (119)
--------
36,385
--------
$144,855
--------
--------
</TABLE>
<PAGE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (AMBASSADOR MERGER)
For the Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
COMPLETED
TRANSACTIONS
PREVIOUSLY AMBASSADOR AMBASSADOR
FILED AMBASSADOR PURCHASE PRICE PRO
PRO FORMA (A) HISTORICAL (B) ADJUSTMENTS (C) FORMA
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Rental and other property revenues $ 284,174 $ 93,329 - $ 377,503
Property operating expenses (121,274) (36,088) - (157,362)
Owned property management expense (10,002) - - (10,002)
--------- -------- ------ ---------
Income from property operations before depreciation 152,898 57,241 - 210,139
Depreciation (55,542) (18,979) (4,430) (D) (78,951)
--------- -------- ------ ---------
Income from property operations 97,356 38,262 (4,430) 131,188
--------- -------- ------ ---------
Management fees and other income 21,750 - - 21,750
Management and other expenses (15,304) - - (15,304)
Corporate overhead allocation (588) - - (588)
Amortization (7,201) - - (7,201)
--------- -------- ------ ---------
Income from service company business (1,343) - - (1,343)
Minority interest in service company business (10) - - (10)
--------- -------- ------ ---------
Company's share of income from service company busines (1,353) - - (1,353)
--------- -------- ------ ---------
General and administrative expenses (6,421) (7,392) 7,392 (E) (6,421)
Interest expense (61,084) (26,987) 2,593 (F) (85,478) (J)
Interest income 10,576 - - 10,576
Minority interest in other partnerships 1,803 (851) 851 (G) 1,803
Equity in losses of unconsolidated partnerships (10,462) 405 - (10,057)
Equity in earnings of unconsolidated subsidiaries 10,426 - - 10,426 (L)
--------- -------- ------ ---------
Income from operations 40,841 3,437 6,406 50,684
Income tax provision - - - -
Gain on sale of property - - - -
--------- -------- ------ ---------
Income before extraordinary item and minority interest in
Operating partnership 40,841 3,437 6,406 50,684
Extraordinary item-early extinguishment of debt - - - -
--------- -------- ------ ---------
Net income before minority interest in Operating Partnership 40,841 3,437 6,406 50,684
Minority interest in Operating Partnership (2,452) (386) (598) (H) (3,436)
--------- -------- ------ ---------
Net Income $ 38,389 $ 3,051 $ 5,808 $ 47,248 (J)
--------- -------- ------- ---------
--------- -------- ------- ---------
Income attributable to preferred shareholders $ 19,932 $2,296 $(2,296) (I) $ 19,932 (K)
--------- -------- ------- ---------
--------- -------- ------- ---------
Income attributable to common shareholders $ 18,457 $ 755 $ 8,104 $ 27,316 (J)
--------- -------- ------ ---------
--------- -------- ------ ---------
Basic earnings per common share $ 0.46 $0.59 (J)
--------- ---------
--------- ---------
Diluted earnings per common share $ 0.46 $0.58 (J)
--------- ---------
--------- ---------
Weighted average number of common shares outstanding 40,106 46,529
--------- ---------
--------- ---------
Weighted average number of common shares and common share
equivalents outstanding 40,487 46,910
--------- ---------
--------- ---------
</TABLE>
(A) Represents AIMCO's pro forma consolidated results of operations
before giving expense to the Ambassador Merger.
(B) Represents the audited historical statement of operations of
Ambassador for the year ended December 31, 1997. Certain
reclassifications have been made to
<PAGE>
Ambassador's Historical Statement of Operations to conform to
AIMCO's Statement of Operations presentation. The Ambassador
Historical Statement of Operations excludes extraordinary loss of
$1,384 and a loss on sale of an interest rate cap of $509.
(C) Represents the following adjustments occurring as a result of the
Ambassador Merger: (i) the incremental depreciation of the purchase
price adjustment related to real estate; (ii) the reduction in
personnel costs, primarily severance costs, pursuant to a
restructuring plan; (iii) the amortization of goodwill resulting
from the Ambassador Merger; (iv) the reduction in interest expense
resulting from the net reduction of debt; and (v) the elimination of
the minority interest associated with Jupiter I, L.P. and Jupiter
II, L.P.
(D) Represents incremental depreciation related to the real estate assets
purchased in connection with the Ambassador Merger. Buildings and
improvements are depreciated on the straight-line method over a period
of 30 years, and furniture and fixtures are depreciated on the
straight-line method over a period of 5 years.
(E) Decrease results from identified historical costs of certain items
which will be eliminated or reduced as a result of the Ambassador
Merger, as follows:
<TABLE>
<S> <C>
Duplication of public company expenses.............. $ 724
Reduction in salaries and benefits.................. 4,197
Merger related costs................................ 524
Other............................................... 1,947
--------
$ 7,392
--------
--------
</TABLE>
The reduction in salaries and benefits is pursuant to a restructuring
plan, approved by AIMCO senior management, assuming that the
Ambassador Merger had occurred on January 1, 1997 and that the
restructuring plan was completed on January 1, 1997. The
restructuring plan specifically identifies all significant actions to
be taken to complete the restructuring plan, including the reduction
of personnel, job functions, location and date of completion.
(F) Represents the decrease in interest expense of $3,612 related to the
repayment of the Ambassador revolving lines of credit upon
consummation of the Ambassador Merger, offset by an increase in
interest expense of $1,019 related to borrowings to redeem the
remaining limited partnership interests not owned by Ambassador in
Jupiter-I, L.P. and Jupiter-II, L.P.
(G) Represents elimination of minority interest in Jupiter-I, L.P. and
Jupiter-II, L.P. resulting from the redemption of limited partnership
interests not owned by Ambassador in connection with the Ambassador
Merger.
(H) Represents adjustments to Minority Interest in Operating Partnership
assuming the Ambassador Merger had occurred as of January 1, 1997. On
a pro forma basis, without giving effect to the Ambassador Merger, as
of December 31, 1997, the minority interest percentage is
approximately 11.7%. On a pro forma basis, giving effect to the
Ambassador Merger, as of December 31, 1997, the minority interest
percentage is approximately 11.2%.
(I) Represents the elimination of the preferred stock dividends of
Ambassador upon the conversion of the preferred stock to Ambassador
Common Stock.
<PAGE>
(J) The following table presents the net impact to pro forma net income
applicable to holders of AIMCO Common Stock and net income per share
of AIMCO Common Stock assuming the interest rate per annum increases
by 0.25%:
<TABLE>
<S> <C>
Increase in interest expense $ 69
---------
---------
Income before minority interest in Operating Partnership 50,615
Minority interest in Operating Partnership (3,428)
---------
Net income $ 47,187
---------
---------
Net income attributable to common stockholders $ 27,255
---------
---------
Basic earnings per common share $0.59
---------
---------
Diluted earnings per common share $0.58
---------
---------
</TABLE>
(K) Represents the net income attributable to holders of the AIMCO Class B
Preferred Stock, the AIMCO Class C 9% Cumulative Preferred Stock, and
the AIMCO Class D 8.75% Cumulative Preferred Stock as if these stock
offerings had occurred as of January 1, 1997.
(L) Represents AIMCO's equity in earnings in the Unconsolidated
Subsidiaries of $5,676, plus the elimination of intercompany interest
expense of $4,750. The combined Pro Forma Statement of Operations of
the Unconsolidated Subsidiaries for the year ended December 31, 1997
is presented below, which represents the effects of the Ambassador
Merger, the NHP Merger and the NHP Reorganization as if these
transactions had occurred as of January 1, 1997.
<PAGE>
<TABLE>
<CAPTION>
COMPLETED TRANSACTION
PRO FORMA
-------------------
<S> <C>
Rental and other property revenues $ 12,565
Property operating expenses (6,886)
Owned property management expense (625)
--------
Income from property operations before depreciation 5,054
Depreciation (1,805)
--------
Income from property operations 3,249
Management fees and other income 65,768
Management and other expenses (32,136)
Depreciation and amortization (7,743)
--------
Income from service company business 25,889
--------
General and administrative expenses (6,573)
Interest expense (11,907)
Interest income 853
Minority interest in other partnerships (621)
--------
Income from operations 10,890
Income tax provision (4,915)
--------
Net income $ 5,975
--------
--------
Income attributable to preferred stockholders $ 5,676
--------
Income attributable to common stockholders $ 299
--------
--------
</TABLE>
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF
APARTMENT INVESTMENT AND MANAGEMENT COMPANY (INSIGNIA MERGER)
INTRODUCTION
On March 17, 1998, AIMCO entered into an Agreement and Plan of Merger
(the "Insignia Merger Agreement") with Insignia Financial Group, Inc.
("Insignia") pursuant to which Insignia will be merged with and into AIMCO
with AIMCO as the survivor (with the spin-off and purchase of 25% of Insignia
Properties Trust ("IPT") as discussed below, the "Insignia Merger"). The
Insignia Merger Agreement provides that prior to the Insignia Merger,
Insignia will spin-off to its stockholders all assets related to its U.S. and
international commercial real estate business, its New York-based cooperative
and condominium management company, its single-family home brokerage
operations and other select holdings. Pursuant to an Indemnification
Agreement entered into in connection with the Insignia Merger Agreement (the
"Insignia Indemnification Agreement"), the spun off company ("SpinCo") will
provide indemnification for certain liabilities arising under the Insignia
Merger Agreement.
In the Insignia Merger the common stock, par value $0.01 per share, of
Insignia ("Insignia Common Stock") will be converted, assuming the
stockholders of AIMCO and Insignia approve the Insignia Merger, into the
right to receive an aggregate of approximately $303 million of Series E
Preferred Stock, par value $0.01 per share, of AIMCO ("Series E Preferred
Stock"). In addition to receiving the same dividends as holders of AIMCO
Common Stock, holders of Series E Preferred Stock will be entitled to a
preferred dividend of $50 million in the aggregate, and when the preferred
dividend is paid, the Series E Preferred stock will automatically convert
into AIMCO Common Stock on a one-for-one basis, subject to antidilution
adjustments, if any. In addition, AIMCO will assume approximately $307
million in outstanding indebtedness and other liabilities and will assume
approximately $150 million of 6 1/2% Trust Convertible Preferred Securities
issued by Insignia Financing I, a subsidiary of Insignia (the "TOPRs"), for a
total transaction value of approximately $811 million. Also, the Insignia
Merger Agreement provides that AIMCO is required to propose to acquire (by
merger) the outstanding shares of beneficial interest in Insignia Properties
Trust, a Maryland real estate investment trust ("IPT"), at a price of at
least $13.25 per IPT share and use its reasonable best efforts to consummate
the transaction after the closing of the Insignia Merger, but not earlier
than August 15, 1998. IPT is an approximately 75% owned subsidiary of
Insignia; the 25% of the shares of IPT not owned by Insignia are valued at an
aggregate of approximately $100 million, assuming a value of $13.25 per
share. If the Insignia Merger is consummated, AIMCO will assume property
management of approximately 192,000 multifamily units which consist of
general and limited partnership investments in 115,000 units and third party
management of 77,000 units for aggregate consideration of approximately $911
million. Insignia's approximately 75%-owned real estate investment trust
subsidiary, Insignia Properties Trust, owns a 32% weighted average general
and limited partnership interest in approximately 51,000 units.
<PAGE>
PRO FORMA FINANCIAL INFORMATION (INSIGNIA MERGER)
The following Pro Forma Consolidated Balance Sheet (Insignia Merger) of
AIMCO as of December 31, 1997 has been prepared as if each of the following
transactions had occurred as of December 31, 1997:(i) all the transactions
discussed in the Pro Forma Financial Statements (Ambassador Merger); (ii) the
Insignia Merger; and (iii) the transfer of certain assets and liabilities of
Insignia to the Unconsolidated Subsidiaries (the "Insignia Reorganization").
The following Pro Forma Consolidated Statement of Operations (Insignia
Merger) of AIMCO for the year ended December 31, 1997 has been prepared as if
each of the following transactions had occurred as of January 1, 1997: (i)
all the transactions discussed in the Pro Forma Financial Statements
(Ambassador Merger); (ii) the Insignia Merger; and (iii) the Insignia
Reorganization.
The following Pro Forma Financial Information (Insignia Merger) is based, in
part, on the audited Consolidated Financial Statements of Insignia for the
year ended December 31, 1997. The following Pro Forma Financial Information
(Insignia Merger) is also based, in part, on the Pro Forma Financial
Information (Ambassador Merger) of AIMCO. Such pro forma information is
based in part upon: (i) the audited Consolidated Financial Statements of
Ambassador for the year ended December 31, 1997; (ii) the audited
Consolidated Financial Statements of AIMCO for the year ended December 31,
1997; and (iii) the historical financial statements of certain properties and
companies acquired by AIMCO filed in AIMCO's Current Reports on Form 8-K,
dated April 16, 1997, May 5, 1997, June 3, 1997, September 19, 1997, October
15, 1997, December 1, 1997, and December 23, 1997. The following Pro Forma
Financial Information (Insignia Merger) should be read in conjunction with
such financial statements and notes thereto. In the opinion of AIMCO's
management, all material adjustments necessary to reflect the effects of
these transactions have been made.
The unaudited Pro Forma Financial Information (Insignia Merger) has been
prepared using the purchase method of accounting whereby the assets and
liabilities of Insignia, Ambassador, and NHP are adjusted to estimated fair
value, based upon preliminary estimates, which are subject to change as
additional information is obtained. The allocations of purchase costs are
subject to final determination based upon estimates and other evaluations of
fair value. Therefore, the allocations reflected in the following unaudited
Pro Forma Financial Information (Insignia Merger) may differ from the amounts
ultimately determined.
The unaudited Pro Forma Financial Information (Insignia Merger) has been
prepared under the assumption that the AIMCO stockholders approved the
issuance of the Series E Preferred Stock, the Series E Preferred Stock has
been converted to AIMCO Common Stock, and AIMCO purchased the remaining 25%
interest in IPT not owned by Insignia.
If the stockholders of AIMCO do not approve the Insignia Merger, the
Insignia Merger may nonetheless be consummated. However, instead of
receiving $303 million in Series E Preferred Stock, holders of Insignia
Common Stock would receive approximately $203 million in Series E Preferred
Stock, and $100 million in Series F Preferred Stock, par value $0.01 per
share of AIMCO ("Series F Preferred Stock"). In
<PAGE>
either case, holders of Series E Preferred Stock would be entitled to a
preferred dividend of $50 million. Holders of Series F Preferred Stock will
be entitled to receive the greater of (i) the dividends received by holders
of AIMCO Common Stock and (ii) preferred distributions of 10% of the face
value of the Series F Preferred Stock, with the preferred return rate
escalating by 1% each year until a 15% annual return is achieved. Upon the
approval by stockholders of AIMCO, the Series F Preferred Stock will convert
into AIMCO Common Stock on a one-for-one basis, subject to antidilution
adjustments, if any.
The following unaudited Pro Forma Financial Information (Insignia
Merger) is presented for informational purposes only and is not necessarily
indicative of the financial position or results of operations of AIMCO that
would have occurred if such transactions had been completed on the dates
indicated, nor does it purport to be indicative of future financial positions
or results of operations. In the opinion of AIMCO's management, all material
adjustments necessary to reflect the effects of these transactions have been
made.
<PAGE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (INSIGNIA MERGER)
As of December 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
INSIGNIA AIMCO BEFORE
AMBASSADOR INSIGNIA PURCHASE PRICE INSIGNIA
PRO FORMA(A) HISTORICAL(B) SPINCO(C) ALLOCATIONS (D) REORGANIZATION(E)
------------ ------------- ---------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate $2,172,744 $ 22,357 $ -- $ 24,799 (G) $2,219,900
Property held for sale 6,284 -- -- -- 6,284
Investments in securities 3,833 -- -- -- 3,833
Investments in and notes receivable from
unconsolidated subsidiaries 84,459 -- -- -- 84,459
Investments in and notes receivable from
unconsolidated partnerships 214,650 215,735 (22,102) 473,580 (H) 881,863
Cash and cash equivalents 41,536 88,847 (9,250) -- 121,133
Restricted cash 55,067 -- -- -- 55,067
Accounts receivable 30,242 122,180 (100,816) -- 51,606
Deferred financing costs 27,785 1,187 -- -- 28,972
Goodwill 125,239 158,524 (138,019) (1,570)(I) 144,174
Property management contracts -- 147,256 (48,614) 13,407 (J) 112,049
Other assets 47,460 44,137 (15,319) (1,339)(K) 74,939
---------- -------- --------- -------- ----------
$2,809,299 $800,223 $(334,120) $508,877 $3,784,279
---------- -------- --------- -------- ----------
---------- -------- --------- -------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured notes payable $ 718,713 $ 28,042 $ (3,547) $ -- $ 743,208
Secured tax-exempt bond financing 387,107 -- -- -- 387,107
Secured short-term financing 14,257 159,662 (17,344) 243,865 (L) 400,440
Unsecured short-term financing -- 2,000 -- -- 2,000
Accounts payable, accrued and other
liabilities 128,566 139,838 (95,740) 7,000 (M) 179,664
Deferred tax liability 24,865 (7,213) (3,518)(N) 14,134
Security deposits and deferred income 12,693 2,296 (638) -- 14,351
---------- -------- --------- -------- ----------
1,261,336 356,703 (124,482) 247,347 1,740,904
Minority interest in other partnerships 36,335 61,546 (390) (61,156)(O) 36,335
Minority interest in Operating Partnership 130,764 -- -- -- 130,764
Company-obligated manditorily redeemable
covertible securities of a subsidiary trust -- 144,065 -- -- 144,065
Class A common stock, $.01 par value 467 302 -- (221)(P) 548
Class B common stock, $.01 par value 2 -- -- -- 2
Class A Senior Cumulative Convertible
Preferred Stock, $.01 par value -- -- -- -- --
Class B Cumulative Convertible Preferred
Stock, $.01 par value 75,000 -- -- -- 75,000
Class C Cumulative Preferred Stock,
$.01 par value 60,000 -- -- -- 60,000
Class D Cumulative Preferred Stock,
$.01 par value 105,000 -- 105,000
Additional paid in capital 1,206,531 201,597 (193,036) 342,705 (Q) 1,557,797
Notes receivable on common stock
purchases (35,095) -- -- (35,095)
Distributions in excess of earnings (30,928) 36,010 (16,212) (19,798)(R) (30,928)
Unrealized gain on investments (113) -- -- (113)
---------- -------- --------- -------- ----------
1,380,864 237,909 (209,248) 332,686 1,732,211
---------- -------- --------- -------- ----------
$2,809,299 $800,223 $(334,120) $508,877 $3,784,279
---------- -------- --------- -------- ----------
---------- -------- --------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
INSIGNIA
INSIGNIA PRO
REORGANIZATION(F) FORMA
----------------- --------
<S> <C> <C>
ASSETS
Real estate $ -- $2,219,900
Property held for sale -- 6,284
Investments in securities -- 3,833
Investments in and notes receivable from
unconsolidated subsidiaries 13,276 (S) 97,735 (U)
Investments in and notes receivable from
unconsolidated partnerships -- 881,863
Cash and cash equivalents (11,264)(T) 109,869
Restricted cash -- 55,067
Accounts receivable (21,356)(T) 30,250
Deferred financing costs -- 28,972
Goodwill -- 144,174
Property management contracts (77,410)(T) 34,639
Other assets (14,027)(T) 60,912
--------- ----------
$(110,781) $3,673,498
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
$ --
Secured notes payable -- $ 743,208
Secured tax-exempt bond financing -- 387,107
Secured short-term financing (50,000)(T) 350,400
Unsecured short-term financing -- 2,000
Accounts payable, accrued and other
liabilities (44,989)(T) 134,675
Deferred tax liability (14,134)(T) --
Security deposits and deferred income (1,658)(T) 12,693
--------- ----------
(110,781) 1,630,123
Minority interest in other partnerships -- 36,335
Minority interest in Operating Partnership -- 130,764
Company-obligated manditorily redeemable
covertible securities of a subsidiary trust -- 144,065
Class A common stock, $.01 par value -- 548
Class B common stock, $.01 par value -- 2
Class A Senior Cumulative Convertible
Preferred Stock, $.01 par value -- --
Class B Cumulative Convertible Preferred
Stock, $.01 par value -- 75,000
Class C Cumulative Preferred Stock,
$.01 par value -- 60,000
Class D Cumulative Preferred Stock,
$.01 par value -- 105,000
Additional paid in capital -- 1,557,797
Notes receivable on common stock
purchases -- (35,095)
Distributions in excess of earnings -- (30,928)
Unrealized gain on investments -- (113)
--------- ----------
-- 1,732,211
--------- ----------
$(110,781) $3,673,498
--------- ----------
--------- ----------
</TABLE>
- ---------------------
(A) Represents AIMCO's pro forma consolidated financial position after
giving effect to the Ambassador Merger.
(B) Represents the audited consolidated financial position of Insignia as
of December 31, 1997, as reported in Insignia's Annual Report on Form
10-K. Certain reclassifications have been made to Insignia's
historical balance sheet to conform to AIMCO's balance sheet
presentation.
(C) Represents adjustments to give effect to the spin-off of SpinCo.
<PAGE>
(D) Represents adjustments to record the Insignia Merger in accordance
with the purchase method of accounting, based upon the assumed
purchase price of $974,980, as follows:
<TABLE>
<S> <C>
Issuance of 8,134,228 shares of AIMCO Series E Preferred
Stock based on an assumed Series E Conversion
Ratio of $37.25 per share.............................. $303,000
Special dividend to Series E Preferred stockholders......... 50,000
Purchase the 25% interest in IPT not owned by
Insignia............................................... 100,000
Assumption of Company-obligated Mandatorily Redeemable
Convertible Securities of a subsidiary trust.............. 144,065
Consideration related to the conversion of Insignia stock
options to AIMCO stock options......................... 48,347
Assumption of Insignia liabilities.......................... 308,434
Deferred tax liability...................................... 14,134
Insignia Merger costs (see calculation below)............... 7,000
--------
$974,980
--------
--------
</TABLE>
The following is a calculation of the estimated fees and other expenses
related to the Insignia Merger:
<TABLE>
<S> <C>
Expected severance costs........................... $ 2,000
Legal fees......................................... 3,000
Other professional fees, including printing........ 2,000
-------
$ 7,000
-------
-------
</TABLE>
(E) Represents the effects of AIMCO's purchase of Insignia immediately
after the Merger. These amounts do not give effect to the Insignia
Reorganization, which includes the transfer of certain assets of
Insignia to the Unconsolidated Subsidiaries. The Insignia
Reorganization must occur immediately after the Merger in order for
AIMCO to maintain its qualification as a REIT. This column is
included as an intermediate step to assist the reader in
understanding the entire nature of the Insignia Merger transaction.
The assets and liabilities of Insignia are adjusted to estimated fair
value, based upon preliminary estimates, which are subject to change
as additional information is obtained.
(F) Represents adjustments related to the Insignia Reorganization,
whereby AIMCO will contribute to the combined Unconsolidated
Subsidiaries certain assets and liabilities of Insignia, primarily
related to the management operations owned by Insignia. The
adjustments reflect the transfer of assets valued at AIMCO's new
basis resulting from the allocation of the purchase price of
Insignia. AIMCO will receive preferred stock as consideration in
exchange for the net assets contributed. The net deferred tax
liability is assumed by the Unconsolidated Subsidiaries as it
resulted from the assets and liabilities transferred to the
Unconsolidated Subsidiaries.
<PAGE>
(G) Represents the adjustment to record Insignia's consolidated real
estate assets, net, to estimated fair value.
(H) Represents the adjustment to record Insignia's investment in
unconsolidated partnerships to estimated fair value.
(I) Represents the consideration paid in excess of identifiable tangible
assets and identifiable intangible assets, based on the preliminary
valuation of tangible and intangible assets.
(J) Represents the adjustment to record Insignia's investment in property
management contracts to estimated fair value.
(K) Represents the elimination of Insignia's organization costs of
$4,489, offset by an adjustment of $3,150 to record Insignia's other
assets to estimated fair value.
(L) Represents borrowings under AIMCO's Credit Facility and other
financing to fund (i) the $50 million special dividend for the Series
E Preferred Stock; (ii) the purchase price of the 25% of IPT not
owned by Insignia for $100 million; and (iii) $93,865 related to the
difference between Insignia's historical liabilities (excluding deferred
tax liabilities) and $308,434. The assets related to the additional
liability of $93,865 will be allocated to SpinCo upon consummation of the
spin-off. As of December 31, 1997, AIMCO's maximum availability under its
Credit Facility was $100 million. AIMCO expects to obtain financing with
rates similar to its Credit Facility in order to pay for the amounts in
excess of the availability under the Credit Facility.
(M) Represents the liability related to the estimated Insignia Merger costs.
(N) Represents the adjustment to record deferred tax liability resulting from
the differences in the fair value and tax basis of property management
contracts and other assets.
(O) Represents the elimination of the 25% of IPT not owned by Insignia upon
AIMCO's purchase of the remaining IPT stock.
(P) Represents the elimination of Insignia's Common Stock at $.01 par
value ($302) net of the issuance of AIMCO Common Stock at $.01
par value ($81) (see Note Q).
(Q) Represents the increase to paid-in capital to reflect the following:
<TABLE>
<S> <C>
Issuance of 8,134,228 shares of AIMCO Common Stock at
$37.25 per share...................................... $ 303,000
Less: Par value of AIMCO Common Stock Issued.............. (81)
Insignia's historical paid-in-capital................. (8,561)
Consideration related to the conversion of Insignia stock
options to AIMCO stock options........................ 48,347
----------
$ 342,705
----------
----------
</TABLE>
<PAGE>
(R) Represents the elimination of Insignia's retained earnings, as a
result of the Insignia Merger.
(S) Represents the increase in AIMCO's investment in the Unconsolidated
Subsidiaries to reflect the contribution of the equity in certain assets
and liabilities to the Unconsolidated Subsidiaries.
(T) Represents certain assets and liabilities of Insignia, primarily related
to the management operations of Insignia, contributed by AIMCO to the
Unconsolidated Subsidiaries, valued at AIMCO's new basis resulting from the
allocation of the purchase price of Insignia.
<PAGE>
(U) Amount represents notes receivable from the Unconsolidated
Subsidiaries of $50,000 and equity in the Unconsolidated Subsidiaries
of $47,735. The combined historical balance sheet of the
Unconsolidated Subsidiaries as of December 31, 1997 is presented
below, which reflects the effects of the Insignia Merger and the
Insignia Reorganization as if such transactions had occurred as of
December 31, 1997.
<TABLE>
<CAPTION>
Ambassador Insignia Insignia
Pro Forma(i) Reorganization(ii) Pro Forma
------------ ------------------ ---------
<S> <C> <C> <C>
Assets
Real estate $ 23,317 $ -- $ 23,317
Cash and cash equivalents 5,261 11,264 (iii) 16,525
Restricted cash 1,896 -- 1,896
Management contracts 51,441 77,410 (iii) 128,851
Accounts receivable 5,627 21,356 (iii) 26,983
Deferred financing costs 477 -- 477
Goodwill 43,523 -- 43,523
Other assets 13,313 14,027 (iii) 27,340
-------- -------- --------
$144,855 $124,057 $268,912
-------- -------- --------
-------- -------- --------
Liabilities and Stockholders' Equity
Secured notes payable $ 25,301 $ -- $ 25,301
Secured tax-exempt bond financing -- -- --
Secured short-term financing 50,000 50,000 (iii) 100,000
Unsecured short-term financing -- -- --
Accounts payable, accrued and other
liabilities 20,978 44,989 (iii) 65,967
Security deposits and deferred income 3,013 1,658 (iii) 4,671
Deferred tax liability 9,178 14,134 (iv) 23,312
-------- -------- --------
108,470 110,781 219,251
Common stock 2,071 699 (v) 2,770
Preferred stock 34,459 13,276 (vi) 47,735
Retained earnings (26) -- (26)
Notes receivable on common stock
purchases (119) (699)(v) (818)
-------- -------- --------
36,385 13,276 49,661
-------- -------- --------
$144,855 $124,057 $268,912
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------------
(i) Represents the Unconsolidated Subsidiaries pro forma consolidated
financial position after giving effect to the Ambassador Merger
(ii) Represents adjustments related to the Insignia Reorganization,
whereby AIMCO will contribute to the combined Unconsolidated
Subsidiaries certain assets and liabilities of Insignia, primarily
related to the management operations owned by Insignia. The
adjustments reflect the transfer of assets valued at AIMCO's new
basis resulting from the allocation of the purchase price of
Insignia. AIMCO will receive preferred stock as consideration in
exchange for the net assets contributed. The net deferred tax
liability is assumed by the Unconsolidated Subsidiaries as it
resulted from the assets and liabilities transferred to the
Unconsolidated Subsidiaries.
<PAGE>
(iii) Represents certain assets and liabilities of Insignia, primarily
related to the management operations of Insignia, contributed by
AIMCO to the Unconsolidated Subsidiaries, valued at AIMCO's new basis
resulting from the allocation of the purchase price of Insignia.
(iv) Represents the establishment of the estimated net deferred federal
and state tax liabilities at a combined rate of 40% for the estimated
difference between the book and tax basis of the net assets of the
Unconsolidated Subsidiaries. The primary component of the deferred tax
liability is the difference between the new basis of the property
management contracts, as a result of the allocation of the purchase
price of Insignia, and the historical tax basis.
(v) Represents the issuance of common stock to the common stockholders of the
Unconsolidated Subsidiaries in exchange for notes receivable, in order for
the common stockholders to maintain their respective ownership interest in
the Unconsolidated Subsidiaries.
(vi) Represents the issuance of preferred stock to AIMCO in exchange for
the contribution if certain assets and liabilities of Insignia,
valued at AIMCO's new basis resulting from the allocation of purchase
price of Insignia.
<PAGE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (INSIGNIA MERGER)
For the Year Ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Insignia
Ambassador Insignia Purchase Price Insignia Insignia
Pro Forma(A) Historical(B) SpinCo(C) Adjustments(D) Reorganization(E) Pro Forma
------------ ------------- --------- -------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rental and other property revenues $ 377,503 $ 6,646 $ -- $ -- $ -- $ 384,149
Property operating expenses (157,362) (3,251) -- -- -- (160,613)
Owned property management expense (10,002) -- -- -- -- (10,002)
---------- --------- --------- --------- -------- ---------
Income from property operations
before depreciation 210,139 3,395 -- -- -- 213,534
Depreciation (78,951) (966) -- (1,321)(F) -- (81,238)
---------- --------- --------- --------- -------- ---------
Income from property operations 131,188 2,429 -- (1,321) -- 132,296
---------- --------- --------- --------- -------- ---------
Management fees and other income 21,750 389,626 (295,712) (73,988)(M) 41,676
Management and other expenses (15,304) (315,653) 256,151 3,873 (G) 47,250 (M) (23,683)
Corporate overhead allocation (588) -- -- -- -- (588)
Depreciation and amortization (7,201) (31,709) 15,490 (25,196)(H) 28,922 (N) (19,694)
---------- --------- --------- --------- -------- ---------
Income from service company business (1,343) 42,264 (24,071) (21,323) 2,184 (2,299)
Minority interest in service company
business (10) -- -- -- -- (10)
---------- --------- --------- --------- -------- ---------
Company's share of income from service
company business (1,353) 42,264 (24,071) (21,323) 2,184 (2,299)
---------- --------- --------- --------- -------- ---------
General and administrative expenses (6,421) (20,435) 2,644 3,700 (G) 1,779 (M) (18,733)
Interest expense (85,478) (9,353) 318 (18,166)(I) 3,725 (M) (108,954) (Q)
Interest income 10,576 4,571 (457) -- -- 14,690
Minority interest in other partnerships 1,803 (12,448) (41) 2,486 (J) -- (8,200)
Equity in losses of Unconsolidated
Partnerships (10,057) 10,027 (151) (25,357)(K) -- (25,538)
Equity in earnings of Unconsolidated
Subsidiaries 10,426 -- -- -- (4,382)(O) 6,044 (S)
---------- --------- --------- --------- -------- ---------
Earnings before income tax provision
and minority interest in Operating
Partnership 50,684 17,055 (21,758) (59,981) 3,306 (10,694)
Income tax provision -- (6,822) 8,703 (1,881)(L) -- --
---------- --------- --------- --------- -------- ---------
Net income (loss) before minority
interest in Operating Partnership 50,684 10,233 (13,055) (61,862) 3,306 (10,694)
Minority interest in Operating Partnership (3,436)(P) -- -- 3,436 (P) -- --
---------- --------- --------- --------- -------- ---------
Net income (loss) 47,248 10,233 (13,055) (58,426) 3,306 (10,694)(Q)
Income attributable to preferred
stockholders 19,932 -- -- -- -- 19,932 (R)
---------- --------- --------- --------- -------- ---------
Income (loss) attributable to common
stockholders $ 27,316 $ 10,233 $ (13,055) $(58,426) $ 3,306 $ (30,626)(Q)
---------- --------- --------- --------- -------- ---------
---------- --------- --------- --------- -------- ---------
Basic earnings per common share $ 0.59 $ (0.56)(Q)
--------- ---------
--------- ---------
Diluted earnings per common share $ 0.59 $ (0.56)(Q)
--------- ---------
--------- ---------
Weighted average number of common
shares outstanding 46,529 54,663
--------- ---------
--------- ---------
Weighted average number of common
shares and common share equivalents 46,910 54,663
--------- ---------
--------- ---------
</TABLE>
- -------------------
(A) Represents AIMCO's pro forma consolidated results of operations after
giving effect to the Ambassador Merger.
(B) Represents the audited consolidated results of operations of Insignia
as of December 31, 1997, as reported in Insignia's Annual Report on
Form 10-K. Certain reclassifications have been made to Insignia's
historical statement of operations to conform to AIMCO's statement of
operations presentation.
(C) Represents adjustments to give effect to the spin-off of SpinCo.
(D) Represents the following adjustments occurring as a result of the
Insignia Merger: (i) the incremental depreciation of the purchase
price adjustment related to consolidated real estate and investments
in real estate partnerships; (ii) elimination of duplicate general and
administrative and property general and administrative expenses; (iii)
the amortization of goodwill and property management contracts
resulting from the Insignia Merger; (iv) the increase in interest
expense resulting
<PAGE>
from the net increase in debt; (v) the elimination of the income tax
provision; and (vi) the elimination of the minority interest associated
with IPT.
(E) Represents adjustments related to the Insignia Reorganization,
whereby AIMCO will contribute to the combined Unconsolidated
Subsidiaries certain assets and liabilities of Insignia, primarily
related to the management operations owned by Insignia. The
adjustments reflect the related revenues and expenses primarily
related to the management operations owned by Insignia, with
additional amortization recorded related to AIMCO's new basis
resulting from the allocation of the purchase price of Insignia.
(F) Represents incremental depreciation related to the consolidated real
estate assets purchased in connection with the Insignia Merger.
Buildings and improvements are depreciated on the straight-line
method over a period of 20 years, and furniture and fixtures are
depreciated on the straight-line method over a period of 5 years.
(G) Decrease results from identified historical costs of certain items
which will be eliminated or reduced as a result of the Insignia
Merger, as follows:
<TABLE>
<S> <C>
Duplication of expenses................................ $ 5,245
Other.................................................. 2,328
-------
$ 7,573
-------
-------
</TABLE>
(H) Represents incremental depreciation and amortization of the tangible
and intangible assets related to the property management business of
Insignia, based on AIMCO's new basis as adjusted by the allocation of
the purchase price of Insignia, including amortization of property
management contracts of $37,350, goodwill of $946 and depreciation
of furniture, fixtures, and equipment of $3,119, less Insignia's
historical depreciation and amortization of $16,219. Property
management contracts are amortized using the straight-line method
over a period of three years. Furniture, fixtures, and equipment are
depreciated using the straight-line method over a period of three
years. Goodwill is amortized using the straight-line method over 20
years. The allocation of the purchase price of Insignia is
preliminary; therefore the amount and life of goodwill are subject to
change as additional information is obtained and the purchase price
allocation is finalized.
(I) Represents the increase in interest expense of $3,725 related to
borrowings to pay the special dividend of $50 million to the Series E
Preferred stockholders; $7,450 related to borrowings of $100 million
to purchase the remaining stock of IPT; and (iii) $6,991 related to
borrowings of $93,865 for the additional liabilities of Insignia
assumed by AIMCO.
<PAGE>
(J) Represents elimination of minority interest in IPT resulting from the
purchase of the stock of IPT not owned by Insignia.
(K) Represents amortization related to the increased basis in investment
in real estate partnerships, as a result of the allocation of the
purchase price of Insignia, based on an estimated average life of 20
years.
(L) Represents the reversal of Insignia's income tax provision.
(M) Represents the historical income and expenses associated with certain
assets and liabilities of Insignia that were contributed to the
Unconsolidated Subsidiaries, primarily related to the management
operations of Insignia.
(N) Represents the stepped-up depreciation and amortization of certain
management contracts and furniture, fixtures, and equipment that will
be contributed to the Unconsolidated Subsidiaries, primarily related
to the management operations of Insignia.
(O) Represents AIMCO's equity in earnings of the Unconsolidated
Subsidiaries.
(P) Represents adjustments to Minority Interest in Operating Partnership
assuming the Insignia Merger had occurred as of January 1, 1997. On a
pro forma basis, without giving effect to the Insignia Merger, as of
December 31, 1997, the minority interest percentage is approximately
11.2%. On a pro forma basis, giving effect to the Insignia Merger,
as of December 31, 1997, the minority interest percentage is
approximately 9.7%.
(Q) The following table presents the net impact to pro forma net income
applicable to holders of AIMCO Common Stock and net income per share
of AIMCO Common Stock assuming the interest rate per annum increases
by 0.25%:
<TABLE>
<S> <C>
Increase in interest expense $ 1,078
--------
--------
Income before minority interest in Operating Partnership (11,772)
Minority interest in Operating Partnership --
--------
Net income $(11,772)
--------
--------
Net loss attributable to common stockholders $(31,704)
--------
--------
Basic and diluted loss per common share $ (0.58)
--------
--------
</TABLE>
(R) Represents the net income allocated to holders of the AIMCO Class B
Preferred Stock, the AIMCO Class C 9% Cumulative Preferred Stock, and
the AIMCO Class D 8.75% Cumulative Preferred Stock as if these stock
offerings had occurred as of January 1, 1997.
<PAGE>
(S) Represents AIMCO's equity in earnings in the Unconsolidated
Subsidiaries of $1,294, plus the elimination of intercompany interest
expense of $4,750. The combined Pro Forma Statement of Operations of
the Unconsolidated Subsidiaries for the year ended December 31, 1997
is presented below, which represents the effects of the NHP Merger, the
NHP Reorganization, the Ambassador Merger, the Insignia Merger and the
Insignia Reorganization as if these transactions had occurred as of
January 1, 1997.
<TABLE>
<CAPTION>
Ambassador Insignia Insignia
Pro Forma(i) Reorganization(ii) Pro Forma
------------ ------------------ ---------
<S> <C> <C> <C>
Rental and other property revenues $ 12,565 $ -- $ 12,565
Property operating expenses (6,886) -- (6,886)
Owned property management expense (625) -- (625)
-------- -------- --------
Income from property operations before depreciation 5,054 -- 5,054
Depreciation (1,805) -- (1,805)
-------- -------- --------
Income from property operations 3,249 -- 3,249
-------- -------- --------
Management fees and other income 65,768 73,988 (iii) 139,756
Management and other expenses (32,136) (47,250)(iii) (79,386)
Depreciation and amortization (7,743) (28,922)(iv) (36,665)
-------- -------- --------
Income from service company business 25,889 (2,184) 23,705
General and administrative expenses (6,573) (1,779)(iii) (8,352)
Interest expense (11,907) (3,725)(iii) (15,632)
Interest income 853 -- 853
Minority interest in other partnerships (621) -- (621)
-------- -------- --------
Income from operations 10,890 (7,688) 3,202
Income tax provision (4,915) 3,075 (v) (1,840)
-------- -------- --------
Net income $ 5,975 $ (4,613) $ 1,362
-------- -------- --------
-------- -------- --------
Income attributable to preferred stockholders $ 5,676 $ (4,382) $ 1,294
-------- -------- --------
-------- -------- --------
Income attributable to common stockholders $ 299 $ (231) $ 68
-------- -------- --------
-------- -------- --------
</TABLE>
(i) Represents the Unconsolidated Subsidiaries pro forma consolidated results
of operations after giving effect to the Ambassador Merger
(ii) Represents adjustments related to the Insignia Reorganization,
whereby AIMCO will contribute to the combined Unconsolidated
Subsidiaries certain assets and liabilities of Insignia, primarily
related to the management operations owned by Insignia. The
adjustments reflect the related revenues and expenses primarily
related to the management operations owned by Insignia, with
additional amortization recorded related to AIMCO's new basis
resulting from the allocation of the purchase price of Insignia.
(iii) Represents the historical income and expenses associated with certain
assets and liabilities of Insignia that were contributed to the
Unconsolidated Subsidiaries, primarily related to the management
operations of Insignia.
<PAGE>
(iv) Represents the stepped-up depreciation and amortization of certain
management contracts and furniture, fixtures, and equipment that will
be contributed to the Unconsolidated Subsidiaries, primarily related
to the management operations of Insignia.
(v) Represents the estimated Federal and state tax provisions, which are
calculated on the operating results of the Unconsolidated
Subsidiaries, excluding amortization of goodwill, which is not
deductible for tax purposes.