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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
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Commission File Number 1-14373
INSIGNIA FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 56-2084290
(State of Incorporation) (I.R.S. Employer Identification No.)
200 PARK AVENUE, NEW YORK, NEW YORK 10166
(Address of Principal Executive Offices) (Zip Code)
(212) 984-8033
(Registrant's Telephone Number, Including Area Code)
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Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of exchange on which registered
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. { }
At March 15, 2000, there were 20,853,648 shares of Common Stock outstanding.
Based on the reported closing price of $15.00 per share on the New York Stock
Exchange on such date, the aggregate market value of Registrant's Common Stock
held by non-affiliates was approximately $300 million.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders is incorporated by
reference in Part III of this Form 10-K.
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Part I
Item 1. Business
ORGANIZATION
Insignia Financial Group, Inc. ("Insignia" or the "Company"), headquartered
in New York, New York, is the parent company of an international real estate
organization. Insignia's service businesses specialize in commercial real estate
services, single-family home brokerage, mortgage origination, title services,
apartment brokerage and leasing, escrow agency services, condominium and
cooperative apartment management, real estate oriented financial services,
equity co-investment and other services. Additionally, Insignia has developed
substantial Internet-based business applications associated with real estate. As
more fully described below, Insignia's principal businesses are Insignia/ESG,
Inc. (U.S. commercial real estate services), Insignia Richard Ellis (U.K.
commercial real estate services - formerly known as Richard Ellis St. Quintin),
Realty One, Inc. (single-family home brokerage and mortgage origination),
Douglas Elliman (apartment brokerage and leasing) and Insignia Residential
Group, Inc. (condominium and cooperative apartment management). In addition,
Insignia has other European operations in Frankfurt, Germany; Milan, Italy;
Brussels, Belgium; and, with the recently acquired Colliers BDR (to operate as
Insignia BDR), in Amsterdam, the Netherlands (collectively, the "Insignia
Businesses").
Through Insignia/ESG, Insignia provides a broad spectrum of commercial real
estate services in the U.S., including tenant representation, property leasing
and management, property disposition and acquisition, investment sales, mortgage
financing, equity co-investment, development, redevelopment and consulting
services. Insignia/ESG provides these services for tenants, owners and investors
in office, industrial, retail, hospitality and mixed-use properties.
Insignia/ESG is among the leading providers of commercial real estate services
in the United States. Insignia/ESG enjoys a leadership market position in the
New York metropolitan area and significant market positions in property owner
and/or tenant services in Washington, D.C., Philadelphia, Boston, Chicago,
Atlanta, Phoenix, Los Angeles, San Francisco, Dallas, Miami and other major
business districts. In all, Insignia/ESG has operations in 47 markets in the
United States. In addition, Insignia/ESG engages in real estate investment
activities through ownership in co-investments with institutional partners and,
to a lesser extent, development property.
Insignia Richard Ellis is among the leading commercial property services
companies in the United Kingdom, with offices in London, Manchester, Glasgow,
Birmingham, Leeds, Liverpool, Belfast and Jersey. In addition, Insignia has
growing international capabilities, which allow it to meet clients' expanding
global needs, in the United Kingdom, Germany, Italy, Belgium and the
Netherlands. In 1999, the combined operations of Insignia/ESG and Insignia
Richard Ellis completed commercial transactions in excess of 220 million square
feet and arranged the sale of properties valued at over $12.0 billion.
Through Realty One, Insignia Residential Group and Douglas Elliman,
Insignia provides a diversified array of residential real estate services,
including single-family home brokerage, mortgage origination, title services,
escrow agency services, apartment brokerage and leasing and condominium and
cooperative apartment management. Realty One operates a full-service
single-family residential brokerage and mortgage origination business in
northern Ohio and is the eighth largest (based on unit volume) residential real
estate brokerage firm in the United States according to Real Trends "Big Broker
Report" published in May 1999. In 1999, Realty One closed approximately 20,400
transactions valued at over $3.0 billion. First Ohio Mortgage Corporation, a
mortgage loan subsidiary of Realty One that originates single-family home
mortgages for Realty One clients and third parties, underwrote $405 million of
mortgage loans in 1999.
Douglas Elliman, acquired in June 1999, operates the largest residential
real estate brokerage firm in New York City, commanding the number one market
position for both residential sales and rentals according to the annual ranking
of residential brokerage companies nation-wide as published by Real Trends.
Douglas Elliman closed more than 4,600 transactions valued at over $2.2 billion
during 1999.
Insignia Residential Group is the largest manager of cooperatives and
condominiums in the New York metropolitan area, according to a survey in the
February 2000 issue of The Cooperator, and one of the largest apartment managers
in the United States. Insignia Residential Group manages approximately 350
properties, consisting of cooperatives, condominiums and rental properties, and
comprising approximately 62,000 units.
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SPIN-OFF
Insignia, incorporated under the laws of the state of Delaware on May 6,
1998 under the name Insignia/ESG Holdings, Inc., originally was a wholly-owned
subsidiary of a company also named Insignia Financial Group, Inc. ("Former
Parent"). On September 21, 1998, Former Parent effected the spin-off of Insignia
through a pro rata distribution (the "Spin-Off") to the holders of common stock
of Former Parent of all the outstanding common stock of Insignia (the "Common
Stock"). On October 1, 1998, Former Parent (which then consisted solely of
businesses and assets relating to multi-family residential real estate) merged
into Apartment Investment and Management Company, a Maryland corporation
("AIMCO"), with AIMCO being the surviving corporation (the "Merger"). On
November 2, 1998, Insignia assumed the name of Former Parent, "Insignia
Financial Group, Inc.", and reclaimed Former Parent's original New York Stock
Exchange symbol, "IFS." Insignia's principal executive offices are located at
200 Park Avenue, New York, New York 10166, and its telephone number at that
address is (212) 984-8033.
COMMERCIAL REAL ESTATE SERVICES
INSIGNIA/ESG - UNITED STATES OPERATIONS
Real Estate Services
Insignia/ESG's U.S. commercial real estate services business is the largest
component of Insignia's operations, accounting for an estimated 57% of
Insignia's 1999 service revenues. Insignia/ESG's commercial services business
commenced operations in 1991 as a division of Former Parent's residential
property management business. Its growth has come principally through
acquisitions, most notably the June 30, 1996 purchase of Edward S. Gordon
Company Incorporated in New York. Insignia/ESG generated service revenues of
approximately $246.4 million in 1997, $312.9 million in 1998 and $389.2 million
in 1999.
Insignia/ESG provides a broad spectrum of commercial real estate services
to corporations and other major space users, property owners and investors.
These services include tenant representation, property leasing and management,
property acquisition and disposition services, investment sales, mortgage
financing, equity co-investment and consulting services. Insignia/ESG provides
these services in the office, industrial, retail and hospitality sectors of the
commercial real estate industry. At December 31, 1999, Insignia/ESG provided
tenant representation, property management, leasing and other real estate
services for over 223 million square feet of commercial real estate, including
147 million square feet of office space, 55 million square feet of industrial
space, 16 million square feet of retail space and 5 million square feet of mixed
use space. These services are provided on a third-party basis for owners such as
John Hancock Mutual Life, The Irvine Company, Teachers Insurance and Annuity
Association, Chase, J.P. Morgan and others. During 1999, Insignia/ESG completed
U.S. transactions totaling in excess of 178 million square feet of commercial
real estate and arranged the sale of more than $4.3 billion in commercial
properties.
All commercial real estate services in the U.S. are rendered under the
highly regarded Insignia/ESG brand name. Insignia/ESG prides itself on the
consistent, high-quality delivery of its services across geographic markets,
property types and disciplines. It is active to varying degrees in 47 U.S.
markets, and maintains substantial market share in key central business
districts, such as New York, Washington D.C., Philadelphia, Boston, Chicago,
Atlanta, Phoenix, Los Angeles, San Francisco, Dallas, Miami and others.
Specialized divisions within Insignia/ESG include the following: Capital
Advisors (investment sales and financing activities); Hotel Partners
(international hotel brokerage specialist); and Commercial Investments Group
(fee-development and redevelopment services).
The New York metropolitan area is the largest market for Insignia/ESG.
Insignia/ESG represents many leading corporations and property owners, helping
them to fulfill their real estate needs in this marketplace. During 1999,
Insignia/ESG was responsible for 17 of the 50 largest leasing transactions in
the New York metropolitan area according to the February 2000 issue of Crain's
New York Business - giving it a number one ranking for the third year in a row.
Insignia believes that the success and reputation of Insignia/ESG within
the New York metropolitan area serves as the primary catalyst for growth and
expansion of commercial real estate services both domestically and
internationally. Insignia/ESG's growth strategy combines targeted acquisitions
of companies that offer complementary skill sets as well as the establishment of
servicing capabilities in markets where it does not currently offer these
services. Insignia/ESG's expansion is primarily focused on first tier U.S. and
international markets (those comprising 75 million square feet or more) and
secondarily on opportunities in second tier U.S. and international markets
(those
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comprising 25 million to 74 million square feet). Since May 1998, Insignia/ESG
has completed acquisitions of real estate service companies in Chicago,
Philadelphia and Boston (including a hotel brokerage specialist with national
and international service capabilities), and expanded its service operations in
Los Angeles, San Francisco, Atlanta and Miami.
Principal Investment Activities
Equity Co-Investments in Real Estate
In addition to real estate services, Insignia/ESG owns and operates real
estate through the acquisition of existing properties in co-investment ventures
with its institutional partners. Insignia/ESG identifies investment
opportunities for select clients and invests alongside of these clients in the
purchase of qualifying properties. Co-investment partners include Citibank, ING
Barings, Blackacre Capital Management, The Witkoff Group, Lennar, Lone Star
Opportunity Fund, Prudential, GE Investments and Whitehall Street Real Estate.
Insignia/ESG does not compete for acquisitions with its advisory clients who do
not seek co-investment partners.
During 1999, the Company, in partnership with its co-investment clients,
concluded real estate investment purchases of 18 properties comprising
approximately 2.5 million square feet of commercial space and 400 residential
units and having an aggregate asset cost of over $295 million. At December 31,
1999, Insignia held ownership interests in 22 co-investment partnerships owning,
in the aggregate, 37 properties comprising approximately 3,700 apartment units
and 7.3 million square feet of commercial space. Insignia's ownership interests
in these partnerships range from 5% to 35%. Two of these partnerships own
property developed by Insignia. At December 31, 1999, Insignia held investments
of approximately $28.2 million in these real estate properties, which had an
asset cost of more than $850 million in the aggregate.
Insignia also owns three properties, with aggregate real estate carrying
amount of approximately $41.5 million, which are consolidated in the Company's
financial statements at December 31, 1999. Two of the properties, Brookhaven
Village (Norman, Oklahoma) and Dolphin Village (St. Petersburg, Florida), are
retail facilities comprising over 291,000 square feet in the aggregate. The
third is a 226,000 square foot office property located in Richardson, Texas.
This property was developed by Insignia, with 90% of the cost financed, and 100%
leased in late 1999 to Southwestern Bell.
Development Property
At December 31, 1999, the Company held investments of $4.3 million in two
office properties under development and a parcel of land held for development.
The office properties are held by joint ventures formed in 1999 with the
admission of 70% and 75% partners. Development activities on these properties
are not expected to be complete until later in 2000 or 2001.
INSIGNIA RICHARD ELLIS AND OTHER - EUROPEAN OPERATIONS
Insignia's European operations consist of Insignia Richard Ellis in the
United Kingdom, together with other businesses in Germany, Italy, Belgium and
the Netherlands. European operations, which produced approximately $108.6
million in service revenues for 1999, accounted for 16% of Insignia's total
service revenues. For the 1998 and 1997 years, Insignia's European operations
generated service revenues of $65.4 million and $647,000, respectively. The
British Pound (Sterling) represents the only foreign currency of a material
business operation, as more than 90% of Insignia's foreign operations were
attributable to Insignia Richard Ellis in 1999.
Insignia Richard Ellis, one of the three largest commercial real estate
service providers in the United Kingdom, represents the combined operations of
Richard Ellis Group Limited ("REGL") (the 226 year old London-based commercial
real estate firm acquired by Former Parent in February 1998) and St. Quintin
Holdings Limited ("St. Quintin") (the London-based real estate firm acquired in
March 1999). The operations of St. Quintin were merged with REGL in 1999.
Insignia Richard Ellis provides broad-ranging services, including
consulting, project management, appraisal, zoning and other general services.
The major income components, however, are agency leasing, tenant representation
and property sales and financing. Insignia Richard Ellis provides extensive
coverage of the entire United Kingdom market through full-service offices in
London, Glasgow, Birmingham, Leeds, Manchester, Liverpool, Belfast and
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Jersey. During 1999, Insignia Richard Ellis generated service revenues of
approximately $104.6 million, concluded 42 million square feet of transactions
and arranged the sale of more than $7.7 billion in commercial property. In
addition, Insignia Richard Ellis completed the two preeminent assignments in the
London marketplace during 1999 with the transaction value of each exceeding $225
million.
Insignia Richard Ellis's capabilities, culture, operating philosophy and
client base are very similar to Insignia/ESG's. As a result of these
similarities, Insignia has begun to experience synergies and cross-selling
opportunities from the pairing of Insignia Richard Ellis alongside the U.S.
operations of Insignia/ESG. With the ever-increasing global business
environment, particularly with respect to two of the world's leading financial
centers, New York and London, Insignia anticipates that synergies between
Insignia Richard Ellis and Insignia/ESG will become increasingly more
significant over time.
The Company views Insignia Richard Ellis as the springboard for global
expansion of the commercial real estate services business. Since the initial
acquisition of REGL in February 1998, this business unit has assisted in the
establishment of service operations in Frankfurt, Milan and Brussels and also
assisted in the recent acquisition of Colliers BDR in Amsterdam, the
Netherlands. Insignia is continually in search of attractive acquisition
opportunities in select European markets.
COMMERCIAL SERVICES
The full range of commercial services, both in the United States and
Europe, include:
Tenant Representation -- the acquisition or disposition of leased or owned
space on behalf of space users
Consulting -- specialization in large, multi-faceted transactions (usually
50,000 square feet or more) requiring in-depth planning, analysis and execution
Investment Sales -- the sale or acquisition of all types of commercial
property on behalf of owners
Mortgage Financing -- the arrangement of financing (either debt or equity)
on behalf of owners of all types of commercial properties
Agency Leasing -- the marketing of available space within commercial
properties on behalf of owners/landlords and the consummation of leases with
tenants
Property Management -- responsibility for the financial and operational
aspects of a commercial property, which sometime involve specialized services
such as construction management, engineering or energy management
Facilities Management -- responsibility for the delivery of services for
properties owned and occupied by corporations, institutions, government
agencies, hospitals, colleges and universities
Industrial Services -- specialized services performed for the owners and/or
users of manufacturing, warehouse, distribution or flex-space (combining office
and industrial uses) facilities
Property Development and Redevelopment -- development and construction
services for owners of office, industrial and retail properties, and the
re-development/re-positioning of properties for owners looking to create
enhanced value
Real Estate Investment -- primarily through ownership in equity
co-investment partnerships and development property with select clients
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MARKET TRENDS
United States
o Clients Demand More Services; Desire to Consolidate Service Providers
-- As real estate requirements become more sophisticated, clients'
needs follow. Increasingly, companies want to be able to turn to a
single source for all of their real estate use, investment and
management requirements. As a result, clients with multiple real
estate requirements ranging from occupancy needs to investment
objectives are consolidating service providers. Whereas several years
ago it might have been common for real estate owners, users and
investors to hire several different companies in different locations
to manage their needs, the industry is clearly seeing a trend towards
the hiring of fewer providers to address all of a client's
requirements.
o Increasing Sophistication of Transactions -- As companies grow, the
significance of their real estate issues follow suit. It is common
today for a company's real estate occupancy and investment issues to
be second only to labor as a component of overall operating costs.
Additionally, with the increasing sophistication of capital markets,
the trend toward real estate securitization, the tendency of companies
today to merge with others to achieve economies of scale and capture
market share, and the consolidation of worldwide locations that
accompany such mergers, the manner in which corporations manage such
issues can have profound impacts on their financial performance. As a
result, the level of sophistication required to manage such complex
requirements and interrelationships transcends the traditional role of
the real estate broker. Successful commercial real estate services
companies today must be able to manage these requirements in order to
effectively compete.
Insignia/ESG's response to the foregoing is to seek to become an advisor
for corporations and financial institutions with respect to their real estate
use, investment and management requirements in the same manner that major
investment banks are advisors to a corporation's corporate finance requirements.
By focusing on providing the highest quality services with the best talent in
the major business centers of the world, Insignia/ESG seeks to become the
"one-stop" resource for all real estate requirements, specializing in the more
complex and creative transactions that characterize today's worldwide
marketplace.
Europe
o The general consensus among forecasters is that the United Kingdom and
European economies, which are experiencing sustained growth, may see a
modest decline in the growth rate by mid 2001. Occupational demand is
likely to remain strong throughout 2000. In addition, the absence of
new development in a number of key markets in the United Kingdom,
especially in Southeast England, is likely to create further rental
growth and therefore sustain momentum in the property investment
sector.
o Property markets in mainland Europe also remain strong, especially in
the major economic markets in France, Germany, Italy and Spain.
Interest from overseas investors, particularly from the U.S., remains
strong and is tempered only by a general lack of suitable investment
product. However, increasing development activities in these major
markets are expected to bring supply more in line with demand in the
foreseeable future.
COMPETITIVE POSITION
Through Insignia/ESG and Insignia Richard Ellis, the Company believes that
it is well positioned to meet the competitive challenges present in the
commercial real estate marketplace. Among its competitive strengths are:
o strong reputation and the recognition of its brand name within the
industry;
o quality and depth of both its management and brokerage staff;
o entrepreneurial corporate culture, which allows it to respond quickly
to opportunities;
o unique methodologies for implementing large, complex transactions;
o complete array of services, which allows it to both meet existing
client needs and take advantage of
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cross-selling opportunities;
o extensive property services portfolio, which provides significant
economies of scale;
o proven mergers and acquisitions capability;
o strong balance sheet, with commercial assets in excess of $570 million
and minimal debt;
o commercial revenue growth in excess of 400% over the last three years;
o commercial EBITDA growth of approximately 275% over the last three
years;
o market leadership in two of the world's most important financial
centers-- New York and London; and
o focus on attracting, retaining, supporting and promoting the highest
quality, most skilled personnel in the industry.
RESIDENTIAL REAL ESTATE SERVICES
REALTY ONE
Realty One, a full-service residential real estate broker headquartered in
Cleveland, Ohio, was established in 1953 and acquired by Former Parent in
October 1997. Realty One's current business operation is the result of nearly 60
separate mergers and acquisitions. It is the largest residential real estate
brokerage firm in Ohio and the eighth largest (based on unit volume) in the
United States according to the Real Trends "Big Brokers Report" published in May
1999. With more than 1,500 sales associates and 605 corporate and support staff
located in 46 offices throughout northern Ohio, it represents more than 100
residential builders and handles more than 20,000 transactions valued at over $3
billion annually. First Ohio Mortgage Corporation, a subsidiary of Realty One,
originates single-family home mortgages for both Realty One clients and third
parties. Realty One, which produced $104.0 million in service revenues for 1999,
accounted for approximately 15% of Insignia's total service revenues. Realty One
generated service revenues of approximately $103.3 million in 1998 and $23.8
million in 1997 (for the period of ownership), respectively.
DOUGLAS ELLIMAN
Douglas Elliman, acquired in June 1999, operates a residential cooperative,
condominium and rental apartment brokerage and leasing firm in New York City.
Douglas Elliman commands the number one market position for both residential
sales and rentals in New York City and holds leadership positions in upscale
suburban markets through offices in Greenwich and Darien, Connecticut,
Bernardsville/Basking Ridge, New Jersey, and three on Long Island: Manhasset,
Locust Valley, and Port Washington/Sands Point. Founded in 1911, Douglas Elliman
has more than 780 brokers, supported by more than 115 corporate employees in 15
offices in the New York City area. Douglas Elliman closed more than 4,600
transactions valued at over $2.2 billion for the entire 1999 year and generated
service revenues of approximately $49.8 million, or 7% of Insignia's total 1999
service revenues, for the six months of ownership in 1999.
On a combined basis, Realty One and Douglas Elliman comprise the sixth
largest (based on sales volume) residential brokerage business in the United
States, with aggregate revenues of $153.8 million and transaction volume
exceeding $5.0 billion for 1999. On an annualized basis, these businesses
generated service revenues of approximating $200 million in the aggregate.
Insignia continues to evaluate a consolidation-based strategy in the
residential brokerage industry. The industry is currently defined by several key
trends, including:
o Margin Compression -- Margins are being compressed as a result of
increasing splits paid to agents and, for the larger, more progressive
firms, the investment in technology, marketing and development of
one-stop shopping services.
o Market Fragmentation -- There are more than 50,000 residential
brokerages in the U.S., one quarter of which are currently estimated
to be unprofitable, according to various industry research studies.
These
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consist of independent brokerages as well as franchise operations. No
single independent broker commands more than 1% of the national
market, and no national franchise company maintains more than an 11%
market share, with only three franchise companies holding more
than 3%.
The above trends, coupled with the available economies of scale, suggest
that pursuit of a consolidation-based strategy may be capable of reversing the
downward trend in margins and allow for the exploitation of proprietary
technology to build real competitive advantages and insure brand loyalty.
The residential brokerage industry has been consolidating for some time,
and with access to additional capital, Realty One and Douglas Elliman may
acquire key brokerage firms in their respective markets. Realty One already has
significant experience acquiring and assimilating companies, completing
approximately 60 acquisitions over the last 15 years. Insignia believes that the
exceptional brands of Realty One and Douglas Elliman position the Company to
launch the expansion of residential brokerage services throughout the U.S. and
U.K., into key markets where Insignia is already a leading provider of
commercial real estate services.
In addition to consolidation strategies, opportunities exist to increase
profit margins through the expansion of services into related areas, such as
mortgage, escrow, title, valuation and renovation services that, in combination
with e-commerce initiatives, will offer the consumer a true "one-stop shopping"
experience. The approach of both Realty One and Douglas Elliman is to use
advanced technology to bundle services more inexpensively and increase the value
to the consumer. As an example, Insignia expects the use of developing
Internet-based e-commerce capabilities to play an ever-increasing role in the
delivery of services in the residential marketplace.
INSIGNIA RESIDENTIAL GROUP
Insignia Residential Group is the largest manager of cooperative,
condominium and rental apartments in the New York metropolitan tri-state area
according to a recent survey in The Cooperator. Insignia Residential Group
provides full service third-party fee management for approximately 350 total
properties comprising 62,000 residential units in the greater New York
metropolitan area. In addition, Insignia Residential Group has expanded its
scope to include mortgage brokerage services, including resale and financing
arrangements for cooperative and condominium corporations through third-party
financial institutions. During 1999, Insignia Residential Group arranged
approximately $98.0 million of such financing, representing a 6% increase over
1998. Insignia Residential Group generated total service revenues of $26.9
million in 1999, representing 4% of Insignia's service revenues for the 1999
year.
Among the notable properties currently managed by Insignia Residential
Group in New York City are the San Remo, Worldwide Plaza, Fresh Meadows, Horizon
House and West Village Houses, respectively. Manhattan is the largest market for
Insignia Residential Group, although it does maintain a presence in each of the
other four boroughs of New York City as well as Long Island, Westchester County
and Northern New Jersey. Insignia Residential Group increased its New York
management portfolio by over 2,600 units with the August 1999 acquisition of RA
Cohen & Associates.
Insignia Residential Group's strategy is to focus on key markets where its
size and reputation allow it to become the leading player. The Company believes
that Insignia Residential Group's reputation for quality service and the broad
experience of its personnel in managing condominiums and cooperatives throughout
the New York metropolitan area enable it to successfully pursue new property
service opportunities. The Company anticipates that Insignia Residential Group's
economies of scale and state-of-the-art management information system should
allow it to increase profit margins by offering services efficiently and at a
competitive cost. Additionally, the Company expects newly developed e-commerce
initiatives to play a significant role in the delivery of Insignia Residential
Group's services in the residential marketplace.
RESIDENTIAL SERVICES
Realty One, Douglas Elliman and Insignia Residential Group provide the
following services:
Residential Brokerage -- the agency representation of both buyers and
sellers in the purchase and sale of residential housing, including assisting the
seller in pricing the property, marketing and advertising the property, showing
the property to prospective buyers, assisting the parties in negotiating the
terms of the sale and closing the transaction
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Leasing -- the marketing of available space for properties on behalf of
owners/landlords and the consummation of leases with tenants
Rental Brokerage -- the agency representation of rental clients in the
procurement of suitable apartment housing
Relocation Services -- assisting both corporations and individuals in the
sale, procurement and temporary management of residential properties for
corporations and transferees. Realty One assists in large group moves as well as
individual relocations
Builder Marketing Services -- representing and consulting with large
national and local developers providing marketing, research studies, product
development and brokerage services
Mortgage Origination -- through First Ohio Mortgage, Realty One offers
convenient and competitive mortgage services to its customers and many other
brokerages throughout northern Ohio. First Ohio Mortgage represents more than 15
mortgage lenders, each offering multiple financial products
Title Services -- through Insignia Title, a newly formed affiliate created
in January 2000, Realty One offers complete title services to its customers.
This expansion of services further streamlines the home-buying and selling
process by enabling customers to conduct their entire sale or purchase
transaction from one central site, with coordinated business services creating a
true "one-stop shopping" experience
Escrow Agency -- through First Ohio Escrow, Realty One provides residential
escrow agency services facilitating the closing of property sales
Property Management -- involves providing accounting services on a cash or
accrual basis, lease administration, central purchasing, cash management,
insurance oversight, collections and compliance monitoring, and construction
management
Transfer Agent -- On behalf of cooperative and condominium clients,
Insignia Residential Group processes applications of prospective purchasers,
arranges and attends closings, facilitates the assignment of proprietary leases
and provides safekeeping of leases and other documents
Mortgage Brokerage Services -- Insignia Residential Group engages, to a
limited extent, in mortgage brokerage services, including resale and financing
arrangements for its customers through third-party financial institutions
COMPETITION
COMMERCIAL REAL ESTATE SERVICES
Insignia/ESG
Competition is intense in the U.S. commercial property services industry,
particularly in the areas of tenant representation, property leasing and
management and other services in which Insignia/ESG is engaged. Historically,
most competitors have been regional or local companies specializing in one or
more aspects of the business (e.g., property management, tenant representation,
etc.). However, the consolidation trend has spawned fewer, larger international
competitors that are integrated across property types and disciplines.
Insignia/ESG competes increasingly with these full-service national competitors,
including CB Richard Ellis, Cushman & Wakefield, Grubb & Ellis, Jones Lang
LaSalle and Trammel Crow.
Different factors weigh heavily in the competition for tenant
representation and property services assignments. For major tenant
representation assignments, competition is based on quality of services,
demonstrated track record, breadth of resources, analytical skills and market
knowledge. Insignia/ESG has a distinct methodology for executing major tenant
representation assignments, which combines brokerage and consulting disciplines.
This methodology, honed in New York over the past decade, is being exported to
top tier markets throughout the United States. Further, Insignia/ESG has an
outstanding track record in completing major tenant representation assignments.
In 1999, as tenant representative, Insignia/ESG arranged major transactions for
such well-known entities as Marsh & McLennan, Winstar Communications, Martha
Stewart, On-line Media, Waterhouse Securities, and Citigroup. Moreover,
Insignia/ESG's creativity and transaction-structuring expertise have been
recognized by a leading trade group, which
8
annually recognizes two New York City transactions as its "Deals of the Year."
Insignia/ESG has been the recipient of such awards in three of the past four
years, and has earned the top award overall in four of the past five years. The
Company believes that Insignia/ESG's outstanding track record provides a
distinct competitive advantage.
Competition for third-party commercial property service engagements is
based principally on cost and the quality of service, including the ability to
enhance asset values. Insignia/ESG's personnel are experienced in managing a
wide variety of property types in locations throughout the country. This enables
Insignia/ESG to offer an owner of a large diversified portfolio the ability to
obtain experienced management for most or all of its properties through one
organization. The Company believes that Insignia/ESG has demonstrated an ability
to effectively manage, lease and improve the value of properties. In addition,
the Company believes that Insignia/ESG has developed a reputation for quality
service and attention to detail for clients, investors and tenants alike. The
Company also believes that Insignia/ESG's economies of scale and
state-of-the-art management information systems should allow it to offer
services efficiently and at an overall cost that is competitive with or less
expensive than those offered by other property service companies. Because of its
size and diversity, Insignia/ESG is able to control operating costs by spreading
fixed overhead expenses across its large service base, which enhances
profitability and enables Insignia/ESG to pass cost savings on to the property
owners for which it provides services.
Insignia Richard Ellis
Competition is also intense among commercial service providers in the
United Kingdom. Only five commercial services firms in the United Kingdom
currently have annual revenues exceeding $100 million, and no firm maintains
greater than a 5% market share. Insignia Richard Ellis, with 1999 revenues of
$104.6 million, has established itself as a market leader with a "top three"
position (according to a survey published by the Estates Gazette) in commercial
property markets behind only DTZ and Jones Lang Lasalle. The Company believes
that Insignia Richard Ellis's operations and reputation place it at a strategic
advantage over other primary competitors including CB Hiller Parker, Knight
Frank, Cushman & Wakefield and Lambert Smith Hampton.
RESIDENTIAL REAL ESTATE SERVICES
Realty One
Realty One's business accounts for almost one-third of single-family home
sales or listings within the northern Ohio residential market. The number two
firm, Smythe, Cramer Company, is responsible for approximately 20% of the total
sales and listings. Other firms trail significantly further behind. The Company
believes that Realty One's success is due to a number of competitive advantages,
including its leading-edge use of technology and innovative marketing practices.
For example, Realty One's proprietary computer system defines the "readiness" of
potential customers to purchase a home, thus allowing for highly targeted
direct-marketing and advertising programs.
Realty One's marketing practices are spearheaded by its "Welcome Home For
First Time Buyer" and "Welcome Home Advantages" value package programs. These
programs include discounts and other promotional items from various national
vendor participants such as GE appliances, Glidden Paints, Carter Lumber and
Royal Dirt Devil Vacuums. To benefit from either of these programs, consumers
are required to use the brokerage and mortgage origination or title services
offered by Realty One and its subsidiaries. In addition, consumers receive a
free home warranty valued at over $350 when they elect to use the services of
First Ohio Mortgage. The Company believes that the combined value of the free
home warranty and the value packages give Realty One a significant competitive
advantage over its peers.
Douglas Elliman
Douglas Elliman enjoys a long-established presence in the New York City
marketplace with a well-recognized brand name and leading market share. Douglas
Elliman offers a comprehensive range of services and enjoys certain advantages
over its competitors, most notably The Corcoran Group and Halstead Property
Company, based on its size, geographic reach in the New York marketplace and its
alignment alongside the operations of Insignia/ESG and Insignia Residential
Group. For example, the Company expects Douglas Elliman to gain material
competitive benefits from the synergies to be realized by providing residential
brokerage services to Insignia/ESG clients as well as residents of Insignia
Residential Group managed properties.
9
Insignia Residential Group
The cooperative, condominium and apartment management business is extremely
competitive. In addition to several large companies, including Charles
Greenthal, Inc. and Brown, Harris and Stevens, Inc., there are many small
entities that aggressively compete for business. Further, some owner
associations have opted for self-management, which eliminates the need for
third-party service providers altogether. Despite the competitive landscape, the
Company believes Insignia Residential Group has a proven record and that it has
the capability to continue to compete successfully. Insignia Residential Group
has grown to be an industry leader by offering superior service while providing
its clients cost benefits not available from smaller competitors. Examples are
the lower cost of supplies, insurance and other items that Insignia Residential
Group purchases on behalf of its clients using the buying power available
because of size.
INSIGNIA OPPORTUNITY TRUST
In 1999, Insignia sponsored the formation of a private real estate
investment trust ("REIT"), Insignia Opportunity Trust ("IOT"). IOT, through its
subsidiary operating partnership, Insignia Opportunity Partners, invests in real
estate debt and, to a lesser extent, other real estate equity instruments with a
focus on below investment grade commercial mortgage backed securities. IOT
commenced operations in October 1999 and as of December 31, 1999 had invested
approximately $16.3 million in such investments. At December 31, 1999, Insignia
held a $2.3 million investment, or approximately 13% ownership, in IOT. IOT has
received capital commitments for an aggregate $72 million, of which $10 million
is to be invested by Insignia and the remainder to be made by strategic partners
that have invested in other Insignia related transactions in prior years. Such
capital commitments are expected to be funded over the course of 2000 and 2001.
INTERNET INITIATIVES
During 1999, Insignia announced its Internet strategy, which involves an
extensive array of major e-commerce initiatives and strategic alliances,
including internally developed businesses and equity investments in existing
third-party Internet-based businesses. Insignia expects this Internet strategy
to expand the Company's market leadership in commercial and residential real
estate services through a fundamental repositioning of the Company into a
first-tier real estate-oriented Internet services company.
Insignia has developed Internet-based e-commerce models in virtually every
segment of the real estate services businesses in which it currently operates,
including residential sales, commercial and residential property management,
commercial leasing and tenant representation, investing (or committing to
invest) approximately $20 million of its own capital in these initiatives.
During 1999, the Company launched the following upgraded internally developed
Internet websites: www.insigniafinancial.com, www.insigniaesg.com,
www.douglaselliman.com, www.insignia-re.com, www.realtyone.com,
www.insigniaresidential.com and www.knowyourscore.com (a comprehensive
credit-scoring site operated by Realty One subsidiary First Ohio Mortgage).
Insignia also has made strategic investments of approximately $13.5 million
in third-party Internet-based businesses, including: eziaz inc. (formerly
Siteline, Inc.); LoopNet, Inc; PropertyFirst.com, Inc; MyContracts.com, Inc.;
Wireless, Inc.; Cubitz.com, Inc.; Granite Square, Inc.; Concrete Media, Inc.;
and Homestore.com, Inc. Insignia plans to continue to pursue its strategy of
making direct equity investments in third-party Internet-based businesses that
have a real estate oriented focus, and which are believed to have significant
potential for commercial success.
Insignia's first internally developed e-commerce initiative to go "live" on
the Internet is the EdificeRex.com (www.edificerex.com) website, which is
operated by its subsidiary EdificeRex.com, Inc. EdificeRex consists of the
following three principal business lines:
o RESIDENTIAL INTERNET PORTAL. The residential portal operated by
EdificeRex is a building-centric, ultra-local website targeted at
residents of high-end apartment building buildings in major
metropolitan areas. This service was launched in New York City in
February 2000, and is currently operational for more than 150
buildings containing approximately 25,000 apartments. EdificeRex has
entered into contractual agreements to provide its services to over
150,000 apartment units in total, and plans to launch the residential
portal service in major markets across the U.S., including Los
Angeles, San Francisco, Atlanta, Boston, Chicago, Miami, Washington,
D.C., as well as in London. In each market,
10
EdificeRex will feature building-specific functionality and
ultra-local content patterned after the New York City portal.
o COMMERCIAL INTERNET PORTAL. The commercial portal currently under
development by EdificeRex will target small to mid-sized tenants of
commercial office space as well as employees of those tenants. This
portal will also feature ultra-local content and product and service
offerings, but will offer a "national" aggregated corporate buying
feature as well. In addition, the portal will offer both
building-centric and tenant-centric functionality (such as customized,
free Intranet services). The commercial portal service is scheduled to
be rolled-out in the Spring of 2000 in New York City, with service in
additional major metropolitan areas in the U.S. and the U.K. expected
to follow throughout the remainder of the year. EdificeRex has already
entered into contractual arrangements with owners and managers
(including Insignia/ESG) of buildings containing approximately 275
million square feet of commercial office space to provide the portal
in this portal service in those buildings.
o RESIDENTIAL "SMART BUILDING" SERVICES. This service offering features
the installation of building-centric local area networks (LANs) in
individual apartment buildings, which will be used to deliver
high-speed, always-on, wireless broadband Internet access and other
services to residents in the building. Other planned "smart building"
service offerings utilizing the wireless LAN infrastructure include
consumer (resident) oriented services, such as data storage and
back-up, content filtering and delivery of on-demand, rich content
such as video, as well as business (building) oriented services such
as monitoring and alarming of mechanical systems and video
monitor/intercom functionality.
In March 2000, EdificeRex completed a $36 million private equity financing
in which it sold 4,595,349 shares of its Series C Preferred Stock, representing
an approximately 14% equity interest in the company, for $7.81 per share to a
group of approximately 20 investors. Following the financing, Insignia owns
approximately 51% of EdificeRex, with the remainder owned by management,
employees and strategic real estate and operating partners. EdificeRex's
founding real estate partners include Blackacre Capital Management, Apollo Real
Estate Advisors, The Witkoff Group, Milford Management Corporation, The Related
Companies, and Casden Properties.
Insignia expects that its other internally developed Internet-based
businesses will raise third-party capital to fund ongoing operations in a
similar manner as the EdificeRex financing.
BRANDING
In February 2000, Insignia introduced a worldwide corporate branding
program that establishes a new logo for each of the Company's principal
businesses. The centerpiece for this worldwide branding change is a vibrant,
bright blue "i" logo. This logo unites the entire company internationally behind
a highly visible and recognizable face in the marketplace and differentiates the
Company's identity as the "new" Insignia - separate and distinct from that of
the Former Parent entity from which Insignia spun off in late 1998.
ACQUISITIONS
Over the past eight years, Insignia has demonstrated the ability to
recognize accretive acquisition opportunities and to successfully integrate them
within its existing infrastructure. Insignia continues to seek opportunities to
align its business with other market leading real estate service firms that fit
the Company's objectives for expansion. Insignia maintains an internal mergers
and acquisitions staff that includes all senior members of Former Parent's
investment banking group as well as the acquisition analysis staff currently
maintained by Insignia Richard Ellis in the United Kingdom.
Insignia pursues a global acquisition strategy that focuses on the
expansion of each of its international and domestic businesses, while
simultaneously seeking principal opportunities to invest capital in real estate
assets in partnership with its clients. Such undertakings are expected to be in
the areas of both commercial and residential real estate assets and services.
Insignia also expects that, with time, it may pursue opportunities to diversify
its lines of business and investment objectives as circumstances and
opportunities change. Due to the substantial non-cash amortization incurred by
the Company as a result of purchased goodwill and other intangibles,
depreciation of real estate and interest expense charges associated with
acquisition financing, past and future acquisitions may adversely affect net
income.
11
Insignia has acquired the following material service businesses since January 1,
1999:
Colliers BDR
Subsequent to year-end, the Company entered into a definitive agreement to
acquire Colliers BDR, a Dutch real estate services company headquartered in
Amsterdam, the Netherlands. Colliers BDR provides a variety of commercial real
estate services with a specialization in corporate services and international
advisory assignments. The base purchase price was approximately $2.0 million,
all of which was paid in cash. Additional purchase consideration of
approximately $2.5 million, payable over three years, is contingent on the
future performance of this business, which will operate as Insignia BDR.
Douglas Elliman
On June 23, 1999, Insignia acquired Douglas Elliman, a residential real
estate brokerage firm located in New York City. The base purchase price was
approximately $65.0 million, paid in cash from borrowings under Insignia's
revolving credit facility. Additional purchase consideration of up to $10.0
million, payable over the next five years, is contingent on the future revenues
of Douglas Elliman.
St. Quintin Holdings Limited
On March 5, 1999, Insignia acquired St. Quintin, a British real estate
services firm headquartered in London. The operations of St. Quintin were merged
with REGL, and the combined entities now operate under the name Insignia Richard
Ellis throughout the United Kingdom. The base purchase price was approximately
$32.0 million. Additional purchase consideration of up to approximately $12.0
million, payable over the next four years, is contingent on the future
performance of Insignia Richard Ellis. The purchase was funded with
approximately $24.3 million in borrowings under the Company's revolving credit
facility, the issuance of 305,981 shares of the Company's Common Stock and
assumed options to purchase 611,962 shares of the Company's Common Stock.
Lynch Murphy Walsh & Partners
On March 1, 1999, Insignia acquired Lynch Murphy Walsh & Partners ("Lynch
Murphy"), a provider of commercial real estate services located in Boston,
Massachusetts. Lynch Murphy specializes in brokerage services, including
representation of tenants and landlords, investment sales and debt placements,
valuation services and advisory/consulting services. The base purchase price was
$12.0 million, all of which was paid in cash from borrowings under Insignia's
revolving credit facility. Additional purchase consideration of up to $10.0
million, payable over the next three years, is contingent on the future
performance of Lynch Murphy.
MERGER RELATED EXPENSES
Insignia incurred aggregate one-time charges of approximately $4.3 million
($3.1 million, net of tax) in 1999 for merger related expenses in connection
with the acquisition of St. Quintin in March 1999 and its subsequent operational
merger with REGL. The charges reflect the provision for estimated costs of
vacated excess office space sublet and other consolidation expenses incurred in
connection with the operational merger. At December 31, 1999, all such office
space had been disposed of and all other consolidation expenses, including
severance costs, had been incurred.
SEGMENT DATA
Insignia is a fully integrated international real estate services company
with operations in two principal reportable segments: commercial services and
residential services. The commercial services segment provides a diversified
array of services including tenant representation, agency leasing, investment
sales, property management, consulting, brokerage and development. Additionally,
the commercial services segment includes real estate operations, consisting
primarily of ownership in co-investment partnerships and development property.
The residential services segment provides property management services, real
estate brokerage services, mortgage origination services, and title and escrow
agency services.
Segment operations are disclosed in the notes to the accompanying financial
statements of Insignia included in Item 14 of this Form 10-K. These financial
statements should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of
this Form 10-K.
12
SEASONALITY
Seasonal factors affecting the Company are disclosed in Item 7 of this Form
10-K, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", under the caption "Nature of Operations."
ENVIRONMENTAL REGULATION
Under various federal and state environmental laws and regulations, a
current or previous owner or operator of real estate may be required to
investigate and remediate certain hazardous or toxic substances or
petroleum-product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The 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. The presence of
contamination or the failure to remediate contamination may adversely affect the
owner's ability to sell or lease real estate or to borrow using the real estate
as collateral. There can be no assurance that Insignia, or any assets owned or
controlled by Insignia, currently are in compliance with all of such laws and
regulations, or that Insignia will not become subject to liabilities that arise
in whole or in part out of any such laws, rules or regulations. Management is
not currently aware of any environmental liabilities that are expected to have a
material adverse effect upon the operations or financial condition of the
Company.
EMPLOYEES
Insignia has approximately 8,000 employees, including employee brokers and
other qualified real estate agents and sales associates. Insignia believes that
its employee relations are excellent.
EXECUTIVE OFFICERS
The following persons serve as executive officers of Insignia. All
executive officers of Insignia serve at the discretion of the Board of
Directors.
NAME AGE PRINCIPAL POSITIONS
---- --- -------------------
Andrew L. Farkas 39 Chairman of the Board; Chief Executive Officer
Andrew J.M. Huntley 61 Director; Office of the Chairman; Chairman of Insignia Richard Ellis
Stephen B. Siegel 55 Director; President; Chairman and Chief Executive Officer of
Insignia/ESG, Inc.
James A. Aston 47 Chief Financial Officer
Jeffrey P. Cohen 32 Executive Vice President
Frank M. Garrison 45 Office of the Chairman; President of Insignia Financial Services,
Inc.
Adam B. Gilbert 47 Executive Vice President; General Counsel; Secretary
Edward S. Gordon 64 Office of the Chairman
Ronald Uretta 44 Chief Operating Officer; Treasurer; President of Insignia/ESG, Inc;
President of Insignia Residential Group, Inc.
Andrew L. Farkas has been a director and Chairman of Insignia since its
inception in May 1998 and Chief Executive Officer of Insignia since August 1998,
and also serves as the President and Chief Executive Officer of EdificeRex.com,
Inc. Mr. Farkas served as a director of Former Parent from its inception in
August 1990 until the AIMCO merger in September 1998, and as Chairman and Chief
Executive Officer of Former Parent from January 1991 until September 1998. Mr.
Farkas also served as Chairman of the Board of Trustees of Insignia Properties
Trust, a publicly traded REIT subsidiary of Former Parent, from December 1996
until February 1999 (when it was merged into AIMCO) and as Chief Executive
Officer of Insignia Properties Trust from December 1996 until September 1998.
Andrew J.M. Huntley has been a director and member of the Office of the
Chairman of Insignia since its inception in May 1998. Mr. Huntley also serves as
Chairman of Insignia Richard Ellis, with whom he has been employed in various
capacities since February 1965.
13
James A. Aston has been Chief Financial Officer of Insignia since August
1998. Mr. Aston served as Chief Financial Officer of Former Parent from August
1996 until September 1998. Additionally, Mr. Aston served as a Trustee of
Insignia Properties Trust from December 1996 until February 1999 and President
of Insignia Properties Trust from December 1996 until September 1998. Mr. Aston
commenced employment with Former Parent in January 1991.
Jeffrey P. Cohen has been an Executive Vice President of Insignia since
March 2000, and was Senior Vice President of Insignia from May 1998 until that
time. Mr. Cohen also serves as an Executive Managing Director of Insignia
Financial Services, Inc., President of IFS Securities, Inc., a director and
Executive Vice President of EdificeRex.com, Inc. and President of RexSpeed, Inc.
He was a Senior Vice President of Former Parent from April 1997 until September
1998, and Executive Vice President and Secretary of Insignia Properties Trust
from May 1997 until February 1999. From September 1993 until March 1997, Mr.
Cohen was an attorney with the law firm of Rogers & Wells in New York, New York.
Frank M. Garrison has been a member of the Office of the Chairman since
August 1998, and also serves as President of Insignia Financial Services, Inc.
Mr. Garrison served as an Executive Managing Director of Former Parent and
President of its Financial Services division from July 1994 until September
1998. Additionally, Mr. Garrison served as a Trustee of Insignia Properties
Trust from December 1996 until February 1999 and Executive Managing Director of
Insignia Properties Trust from December 1996 until September 1998. Mr. Garrison
commenced employment with Former Parent in January 1992.
Adam B. Gilbert has been General Counsel and Secretary of Insignia since
its inception in May 1998 and Executive Vice President of Insignia since August
1998. Mr. Gilbert also serves as a Senior Vice President of Insignia/ESG and an
Executive Vice President of EdificeRex.com, Inc. He was General Counsel and
Secretary of Former Parent from March 1998 until September 1998. From January
1994 until February 1998, Mr. Gilbert served as a partner in the law firm of
Nixon, Hargrave, Devans & Doyle, LLP in New York, New York.
Edward S. Gordon has been with the Office of the Chairman of Insignia since
its inception in May 1998, and served as Chairman of Insignia/ESG from June 1996
until August 1998. Mr. Gordon was a member of the Office of the Chairman, of
Former Parent, from June 1996 until September 1998. He was Chairman of the
Edward S. Gordon Company Incorporated (now Insignia/ESG), which was acquired by
Former Parent in June 1996, since he founded the company in 1972.
Stephen B. Siegel has been a director of Insignia since its inception in
May 1998 and President of Insignia since August 1998 and is Chairman and Chief
Executive Officer of Insignia/ESG. Mr. Siegel served as President of the Edward
S. Gordon Company Incorporated (now Insignia/ESG) from June 1992 to May 1998.
Ronald Uretta has served as Chief Operating Officer and Treasurer of
Insignia since August 1998. Mr. Uretta also serves as President of Insignia/ESG
and President of Insignia Residential Group. He was Treasurer of Former Parent
from January 1992 until September 1998 and Chief Operating Officer of Former
Parent from August 1996 until September 1998. Mr. Uretta served as a Trustee of
Insignia Properties Trust from December 1996 until October 1998.
There are no family relationships among any of the executive officers of
Insignia.
14
Item 2. Properties
Insignia's principal executive office is located at 200 Park Avenue, in New
York, New York. The following table sets forth information on the operating
leases for the principal headquarters for each of Insignia's principal operating
units:
OPERATING UNIT LOCATION ANNUAL RENT SQUARE FT. EXPIRATION
-------------- -------- ----------- ---------- ----------
Insignia/ESG 200 Park Avenue, New York, NY $4,425,000 120,000 June 2005
Insignia Richard Ellis Berkeley Square House, London 3,200,000 42,000 June 2003
Realty One 6000 Rockside Woods Blvd., Cleveland, OH 650,000 41,000 June 2005
Douglas Elliman 575 Madison Avenue, New York, NY 445,000 30,000 April 2004
Insignia Residential
Group 675 Third Avenue, New York, NY 1,668,000 72,500 April 2009
The Company occupies additional office space in locations throughout the
United States, United Kingdom, Germany, Italy, Belgium and the Netherlands under
leases expiring at various dates between 2000 and 2009. Insignia believes its
facilities are adequate for current and future planned uses.
Item 3. Legal Proceedings
In 1994, Re/Max International and various franchisees filed suit in the
United States District Court for the Northern District of Ohio against Realty
One, alleging claims under the federal antitrust laws and related state law
claims. The suit alleges that Realty One conspired with Smythe, Cramer Company
to institute a series of differential commission splits intended to harm Re/Max
International and its franchisees in the northeast Ohio residential real estate
brokerage market. Plaintiffs' claim actual damages of $30 million. The
applicable federal antitrust law provides, among other things, for the trebling
of actual damages.
In 1997, the District Court granted summary judgment dismissing all of
plaintiffs' federal and state claims. In a ruling issued April 6, 1999, the
Sixth Circuit reversed the District Court's order in substantial part.
Subsequent to the Sixth Circuit ruling, plaintiffs voluntarily dismissed their
monopoly claims. The only remaining claims are the federal antitrust conspiracy
claims, which are set for trial in April 2000. Realty One denies the existence
of any conspiracy, and has defended and continues to defend this action
vigorously.
In connection with Insignia's acquisition of Realty One in October 1997,
the sellers indemnified the Company for any loss arising from such litigation up
to the purchase price of approximately $40 million.
Insignia and certain subsidiaries are defendants in other lawsuits arising
in the ordinary course of business. Claims may result in substantial
compensatory and punitive damages. Management does not expect that the results
of any such lawsuits will have a material adverse effect on the financial
condition, results of operations or cash flows of the Company or its
subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of 1999.
15
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
COMMON STOCK
On September 21, 1998, Former Parent effected the Spin-Off of Insignia
through a pro rata distribution to the holders of common stock of Former Parent
of all the outstanding Common Stock of Insignia. Insignia's Common Stock
commenced trading on the New York Stock Exchange on September 22, 1998 under the
symbol "IEG". On November 2, 1998, the Company reclaimed Former Parent's
original New York Stock Exchange trading symbol and commenced trading under
"IFS".
The following table sets forth the high and low daily closing sale prices
for the Company's Common Stock as reported on the New York Stock Exchange for
the 1998 quarterly periods subsequent to the Spin-Off and for each quarter of
1999:
CALENDAR PERIOD HIGH LOW
- --------------- ---- ---
1998
Third Quarter (commencing September 22, 1998)....... 12 11/16 11 1/2
Fourth Quarter...................................... 14 8 7/8
1999
First Quarter....................................... 15 7/16 12 1/2
Second Quarter...................................... 14 11/16 10 1/4
Third Quarter....................................... 12 1/8 8 1/8
Fourth Quarter...................................... 8 11/16 7 7/16
The closing sales price for Insignia's Common Stock on March 15, 2000, as
reported on the New York Stock Exchange, was $15.00.
The Company's transfer agent is First Union National Bank of North
Carolina, 1525 West W. T. Harris Blvd. Suite 3C3, Charlotte, North Carolina
28262. As of March 15, 2000, there were approximately 1,700 shareholders of
record of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and does not
currently intend to pay any dividends in the foreseeable future. Any payment of
future dividends and the amounts thereof will be dependent upon the Company's
earnings, financial requirements and other factors, including contractual
obligations. The payment of dividends is subject to certain restrictions under
the Company's revolving credit facility.
PREFERRED STOCK ISSUANCE
On February 9, 2000, Insignia sold 250,000 shares of perpetual convertible
preferred stock, with a stated value of $100 per share, to investment funds
advised by Blackacre Capital Management for an aggregate purchase price of $25.0
million. The issuance was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4 (2) thereof. The preferred stock pays a
4% annual dividend, payable at Insignia's option in cash or Common Stock, and is
convertible into the Company's Common Stock at the option of the holder at $14
per share, subject to adjustment. The preferred stock is callable by the
Company, at face value, at any time on or after February 15, 2004.
16
EMPLOYEE STOCK PURCHASE PROGRAM
The Company's 1998 Employee Stock Purchase Plan was adopted to provide
employees with an opportunity to purchase Common Stock through payroll
deductions at a price not less than 85% of the fair market value of the
Company's Common Stock. This plan is designed to qualify under Section 423 of
the Internal Revenue Code of 1986. During 1999, 112,006 shares of Common Stock
were issued under this plan.
STOCK REPURCHASES
As of December 31, 1999, Insignia had repurchased 1,502,600 shares of its
Common Stock at an aggregate cost of approximately $16.2 million. The repurchase
program, which was originally established in October 1998 to allow for the
purchase of up to $10 million of the Company's outstanding Common Stock, was
expanded in 1999 to permit repurchases up to an aggregate $17.5 million. Such
shares held in treasury at December 31, 1999 were reserved for the issuance of
warrants to certain executive officers, non-employee directors and other
employees of the Company. Warrants representing 1,494,500 repurchased shares
were issued in early 2000.
17
Item 6. Selected Financial Data
The following table sets forth certain selected historical financial data
of Insignia and those Insignia Businesses included in the Spin-Off for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995. This information has been
derived from and is qualified by reference to the consolidated financial
statements of the Company and the notes thereto and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included as Item 7 in this Report.
The selected financial data presents the historical financial position,
results of continuing operations and cash flows of those Insignia Businesses
owned by Former Parent prior to the Spin-Off in September 1998 as if Insignia
were a separate entity for all periods presented. This financial information is
not necessarily indicative of results that would have occurred had Insignia
operated as a stand-alone entity separate from Former Parent during the periods
presented prior to the Spin-Off.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $686,366 $510,780 $295,753 $122,005 $ 38,658
Internet-based business expense 1,580 - - - -
Merger related expenses 4,272 - - - -
Provision for loss on subsidiary - 2,300 - - -
Depreciation and amortization 30,979 22,543 15,244 9,197 3,778
Net income (loss) 10,298 11,053 13,055 3,484 (2,278)
Net income per share - assuming dilution (1) 0.46 0.50 0.62 0.16 N/A
OTHER DATA:
EBITDA (2) $ 58,923 $ 48,345 $ 36,633 $ 14,561 $ 1,104
Cash provided by (used in) operating
activities 64,810 35,857 31,370 11,203 (1,399)
AT DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 61,600 $ 53,489 $ 5,514 $ 44 $ 36
Real estate interests 74,007 58,196 19,454 4,465 894
Total assets 795,313 595,489 337,945 171,787 43,074
Total long-term debt 164,322 44,438 19,969 - -
Investment and net advances from Former
Parent - - 208,444 137,777 39,948
Stockholders' equity 393,069 383,243 - - -
(1) Earnings per share for 1998 is presented on a pro forma basis assuming the
Spin-Off occurred at the beginning of the year. Earnings per share for 1997 and
1996 are presented on a pro forma basis solely for comparison because Insignia
was not a separate entity during those periods.
(2) Defined as real estate services revenues less direct expenses and
administrative costs. EBITDA should not be construed to represent cash provided
by operations pursuant to generally accepted accounting principles ("GAAP"), as
it is not defined by GAAP and Insignia's usage of this term may differ from
other companies' usage of the same or similar terms.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
Insignia is among the leading providers of commercial and residential real
estate services in the United States and United Kingdom, with a growing presence
throughout other parts of continental Europe. Insignia operates in two principal
business segments (commercial and residential real estate services) and offers a
diversified array of real estate services including: tenant representation;
agency leasing; property management; consulting; investment sales; development
and redevelopment; mortgage financing; single-family home brokerage; mortgage
origination; title and escrow agency services; and apartment brokerage.
Insignia's revenues from these services totaled $678.5 million in 1999, compared
to $507.4 million in 1998. This growth was attributable primarily to
contributions from 1999 acquisitions, most notably St. Quintin and Douglas
Elliman, and exceptionally strong performance in the U.S. and U.K. commercial
services operations.
In 1999, Insignia's commercial services businesses included Insignia/ESG's
U.S. operations, Insignia Richard Ellis in the United Kingdom and other European
operations in Germany, Italy and Belgium. The commercial businesses produced
aggregate service revenues of $497.8 million in 1999, accounting for
approximately 73% of the Company's total service revenues for the period.
Insignia strengthened its position as a leader in commercial real estate
services internationally through the acquisition of St. Quintin in March 1999
and the establishment of offices in Milan, Italy and Brussels, Belgium in
mid-1999. In addition, Insignia added to its growing capabilities in continental
Europe through the March 2000 acquisition of Colliers BDR, which will operate as
Insignia BDR.
Through Insignia Richard Ellis, which produced service revenues of $104.6
million in 1999, Insignia holds a "top three" market position for commercial
property services in the United Kingdom. The combined strength of Insignia
Richard Ellis in London and Insignia/ESG in New York gives Insignia a commanding
position in two of the world's most important global business centers.
Insignia also continues to pursue opportunities to invest in real estate
assets, primarily through co-investment ventures with its institutional partners
to acquire existing properties and, to a lesser extent, development property. At
December 31, 1999, Insignia held ownership interests in 22 co-investment
partnerships totaling 7.3 million square feet of commercial property and 3,700
multi-family apartment units. Insignia's ownership interests in these
partnerships range from 5% to 35%. At December 31, 1999, the Company also held
investments in two office properties under development and a parcel of land held
for development. The office properties are held by joint ventures formed in 1999
with the addition of 70% and 75% partners.
Insignia also owns three real estate properties - two retail properties
comprising 291,000 square feet and an office property with 226,000 square feet -
that are consolidated in the Company's financial statements at December 31,
1999. All real estate investment activities are managed as a component of the
Company's commercial services business.
In 1999, the residential services businesses included Realty One, Insignia
Residential Group and Douglas Elliman. Realty One, located in Cleveland, Ohio,
is the largest provider of residential real estate brokerage services in Ohio
and the eighth largest (based on unit volume) in the United States according to
Real Trends "Big Broker Report" published in May 1999. Douglas Elliman is the
largest provider of residential brokerage services in New York City. On a
combined basis, Realty One and Douglas Elliman comprise the sixth largest (based
on sales volume) residential brokerage business in the United States, with
aggregate sales transactions in 1999 valued at over $5.0 billion. Insignia
Residential Group is the largest provider of management services to cooperative
and condominium owners in the New York metropolitan area with a total portfolio
of approximately 62,000 units. The residential businesses produced aggregate
service revenues of $180.7 million in 1999.
19
In addition to net income, Insignia uses EBITDA (defined as real estate
services revenues less direct expenses and administrative costs), Net EBITDA
(defined as income before depreciation, amortization, income taxes and
non-recurring one-time charges) and Net EBITDA less income taxes, as indicators
of the Company's financial performance. Management uses these supplemental
measures in the evaluation of operations and in making financial decisions.
BASIS OF PRESENTATION
The comparative financial results for the periods prior to the Spin-Off are
based on the historical financial statements of those Insignia Businesses
spun-off from Former Parent as if effected at the beginning of the applicable
year. Administrative expenses, which included, among other things, investment
banking, information technology, legal, finance, accounting and facilities
expenses of Former Parent, were allocated to Insignia for all periods prior to
the Spin-Off. The administrative allocations, totaling $5.5 million for the nine
months of 1998 prior to the Spin-Off and $6.8 million for 1997, were based on an
analysis of the operations of Former Parent using various methods, including
employee headcount, acquisition activities and estimated management time devoted
to the operations of those Insignia Businesses.
FINANCIAL CONDITION
Total assets increased by approximately $199.8 million to $795.3 million at
December 31, 1999. The primary source of the increase relates to the
acquisitions of Lynch Murphy in Boston (March 1999), St. Quintin in the United
Kingdom (March 1999) and Douglas Elliman in New York City (June 1999). These
acquisitions, comprised substantially of purchased intangibles, fueled the $97.7
million increase in costs in excess of net assets of acquired businesses. The
remainder of the asset growth was primarily attributable to increased
receivables from service activities, property and equipment purchases,
investments in real estate property and investments of approximately $20.0
million in third-party Internet-based businesses and internally developed
Internet-based intellectual property. Liabilities increased by $190.0 million to
$402.2 million at December 31, 1999. This increase is due principally to
borrowings of approximately $109.0 million on Insignia's revolving credit
facility for acquisition financing, increases in commission's payable resulting
from the expansion of commercial real estate service activities and non-recourse
real estate mortgage debt encumbering wholly-owned properties.
20
RESULTS OF OPERATIONS
The following table sets forth certain items derived from the Company's
consolidated statements of operations for the years ended December 31, 1999,
1998 and 1997, respectively.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
REVENUES
Commercial
United States $389,208 $312,940 $246,448
Europe 108,562 65,422 647
Residential 180,701 128,989 48,163
-------- -------- --------
Real Estate Services 678,471 507,351 295,258
Cost and expenses
Real estate services 607,722 451,774 251,855
Administrative 11,826 7,232 6,770
-------- -------- --------
EBITDA - REAL ESTATE SERVICES (1) 58,923 48,345 36,633
Real estate FFO (2) 3,758 1,735 804
Interest and other income 5,191 3,429 495
Foreign currency transaction gains 827 - -
Interest expense (8,206) (1,378) (318)
Minority interests - 371 41
-------- -------- --------
NET EBITDA (1) 60,493 52,502 37,655
Internet-based business expense (1,580) - -
-------- -------- --------
NET EBITDA AFTER INTERNET 58,913 52,502 37,655
Income tax provision (12,226) (12,975) (8,703)
-------- -------- --------
NET EBITDA LESS INCOME TAXES (1) 46,687 39,527 28,952
Provision for loss on subsidiary - (2,300) -
Merger related expenses, net of tax (3,117) - -
Gains on sale of real estate, net of tax 1,660 - -
Depreciation - property and equipment (6,644) (3,090) (1,429)
Amortization of intangibles (23,823) (19,453) (13,815)
Depreciation - real estate (4,465) (3,631) (653)
-------- -------- --------
NET INCOME $ 10,298 $ 11,053 $ 13,055
======== ======== ========
(1) Neither EBITDA, Net EBITDA nor Net EBITDA less income taxes, as disclosed
above, should be construed to represent cash provided by operations determined
pursuant to generally accepted accounting principles ("GAAP"). These measures
are not defined by GAAP and Insignia's usage of these terms may differ from
other companies' usage of the same or similar terms.
(2) Funds From Operations ("FFO") is defined as income or loss from real estate
operations before depreciation, gains or losses on sales of property and
provisions for impairment.
21
YEARS ENDED DECEMBER 31, 1999 AND 1998
Insignia reported strong operating results for 1999, with service revenues
and Net EBITDA totaling $678.5 million and $58.9 million, respectively. These
operating results represented increases of 34% and 12%, respectively, over 1998.
Over $90 million, or approximately 55%, of the revenue growth was attributable
to 1999 acquisitions with the remainder representing internal growth from the
expansion of services and robust market conditions, primarily in the commercial
sector. Net EBITDA for the service businesses, before Internet related expenses
of $1.6 million, grew 15% to $60.5 million for 1999, in comparison to 1998. Net
EBITDA for 1999 was favorably impacted by foreign currency transaction gains of
$827,000 attributable to the portion of the Company's credit facility borrowings
denominated in European currencies. During 1999, Insignia held approximately $25
million of its credit facility borrowings in European currencies to act as a
partial hedge against decreases in European earnings from declines in currency
exchange rates against the U.S. Dollar. Net EBITDA less income taxes increased
18% to $46.7 million in 1999 from $39.5 million in 1998.
Net income for 1999 totaled $10.3 million, reflecting a 7% decline from
$11.1 million in 1998. Net income per share, on a diluted basis, was $0.46 for
1999 compared with $0.50 for 1998. The $4.3 million one-time charge for the
operational merger of St. Quintin and REGL and fourth quarter 1999 expenses of
$1.6 million related to the development of stand-alone Internet-based businesses
adversely affected earnings. On an after-tax basis, these items reduced net
income by approximately $4 million, or $0.17 per share.
The results of operations for the Company are more fully described below.
Commercial Real Estate Operations
Real Estate Services
Commercial real estate service businesses produced an aggregate service
revenue increase of 32% to $497.8 million for 1999, in comparison to $378.4
million for 1998. The increase in service revenue attributable to the
acquisitions of Lynch Murphy in Boston and St. Quintin in the U.K. totaled
approximately $49 million, or 41% of the overall growth over 1998. European
operations, most notably Insignia Richard Ellis, accounted for approximately 36%
of growth over 1998. The remainder of the revenue growth, approximately $70
million, was attributable to the full year impact of the mid-1998 acquisitions
of Hotel Partners and Jackson Cross, internal growth from the expansion of
services in key U.S. markets and favorable market conditions, most notably in
the New York metropolitan area. The commercial service businesses produced
aggregate EBITDA gains of 21% to $56.4 million for 1999 compared to $46.7
million for 1998.
The U.S. commercial service operations produced revenue increases of 24%
from $312.9 million in 1998 to $389.2 million in 1999. Lynch Murphy, acquired in
March 1999, contributed $13.9 million of the 1999 revenue growth. Additionally,
$17.5 million of the service revenue growth for 1999 was a result of the full
year impact of the mid-1998 acquisitions of Hotel Partners and Jackson Cross.
The New York metropolitan area was the primary catalyst behind the remaining
1999 internal growth of approximately $45 million. The New York region produced
record results, with service revenue totaling $186 million, reflecting a gain of
approximately $17.6 million over 1998 levels. Virtually every domestic operating
region reported revenue gains in 1999 in comparison to 1998.
The U.S. commercial service operations produced EBITDA of $41.6 million for
1999, reflecting an increase of 6% over $39.3 million for 1998. The lower
percentage increase in EBITDA, as compared to revenues, was substantially
attributable to an $8.0 million increase in back office support costs resulting
from internal growth and higher information technology costs. The EBITDA results
for 1999 again reflect favorable year-over-year gains by the New York region,
which produced an EBITDA increase of 7% to $36.5 million for 1999 as compared to
1998. In addition, the Company's investment sales unit, Capital Advisors,
produced a $3.2 million increase in EBITDA in 1999 compared to 1998. This
increase for Capital Advisors clearly indicates the full recovery from the
turmoil in the capital markets experienced in the fourth quarter of 1998 and
first quarter of 1999 that resulted in a downturn in investment sales activity.
In Europe, service revenues increased 66% over 1998 levels to $108.6
million in 1999. This increase was primarily attributable to the full year
impact of results for REGL in 1999 (compared to ten months in 1998), the
acquisition and operational merger of St. Quintin with REGL in March 1999 and
the full year impact of the German operation established in June 1998. In 1999,
the combined operation of Insignia Richard Ellis contributed service revenues of
$104.6 million and the German business contributed service revenues of $3.7
million. These results
22
represented gains of 72% and 147%, respectively, compared to 1998. The Italian
and Belgian businesses, established in mid-1999, produced modest revenues of
$245,000 and $28,000, respectively, for the 1999 periods of operation. These
mainland businesses are expected to contribute more meaningful operating results
in the year 2000 and beyond.
European operations contributed EBITDA of $14.7 million for 1999,
reflecting an increase of 101% or $7.3 million over 1998. This significant
EBITDA gain reflects the full recognition of cost savings and revenue growth
associated with the acquisition of St. Quintin and its operational merger with
REGL, which now operate as Insignia Richard Ellis, and a robust real estate
market in the United Kingdom. The integration of these two U.K. market leaders
exceeded Insignia's expected timetable for expense recovery and operational
efficiency. In its first full year of operations, the German business
contributed EBITDA of $551,000 for 1999, reflecting a 51% increase over 1998.
Principal Investment Activities
The commercial operations of Insignia/ESG also include the property
operations of the three wholly-owned real estate properties that are
consolidated in the Company's financial statements for 1999. These properties
produced revenues and pre-tax losses of approximately $1.9 million and
($224,000), respectively. The results of operations for these properties are
excluded from service EBITDA and are included in FFO from real estate
operations.
FFO from real estate ownership produced increases of 117% from $1.7 million
in 1998 to $3.8 million in 1999. This increase reflects the continued
enhancement of operating performance at existing properties resulting from
improved occupancy and further cost efficiencies and the continued investment in
qualifying properties. During 1999, the Company, in partnership with select
clients, concluded real estate investment purchases of 18 properties comprising
approximately 2.5 million square feet of commercial space and 400 residential
units.
Equity earnings from real estate ownership totaled approximately $2.3
million for 1999, compared to losses of $1.9 million for 1998. This substantial
increase was fueled by aggregate realized gains of approximately $2.8 million
($1.7 million after tax) from the sale of eight co-investment properties in
1999. The difference between real estate FFO and equity earnings is represented
by depreciation of real estate, gains or losses from sales of property and
provisions for impairment. Real estate depreciation increased 23% from $3.6
million in 1998 to $4.5 million in 1999.
Residential Real Estate Operations
The residential service operations produced an aggregate service revenue
increase of 40% from $129.0 million for 1998 to $180.7 million for 1999. This
growth was essentially attributable to the acquisition of Douglas Elliman, which
produced service revenues totaling $49.8 million for the six months of ownership
since its acquisition in June 1999. Douglas Elliman experienced significant
growth in its 1999 sales volume over 1998 due to the robust market for
cooperative and condominium sales in New York City. For the full 1999 year,
Douglas Elliman closed transactions valued at more than $2.2 billion, reflecting
an increase of 25% compared to 1998. In addition, Douglas Elliman's average
sales price for 1999 closed transactions saw a 13% increase over 1998 to
$657,000. Realty One produced a service revenue increase of a modest 1% from
$103.3 million in 1998 to $104.0 million for 1999. This achievement of revenue
results nearly in line with the record level of 1998 is noteworthy given Realty
One's sensitivity to interest rates fluctuations. Insignia Residential Group,
which saw its management portfolio expand to more than 62,000 units during 1999,
reported a 5% increase in service revenues from $25.7 million in 1998 to $26.9
million in 1999. First Ohio Mortgage, Realty One's mortgage loan subsidiary,
experienced a 2% decline in loan volume to $405 million compared to 1998 levels,
however, this result was significantly more favorable than that experienced by
most competing mortgage banking companies, which generally saw loan volumes
shrink by more than 30% in 1999.
The residential service operations produced EBITDA gains of 62% from $8.9
million in 1998 to $14.4 million in 1999. Consistent with revenues, the EBITDA
increases are the result of the June 1999 acquisition of Douglas Elliman, which
produced EBITDA of $6.4 million for the six-month period since acquisition.
Realty One reported an EBITDA decline of 7% to $7.4 million in 1999. This
decrease reflects the effects of the year-over-year decline in first quarter
results attributable to the reversion to a more normal seasonal sales pattern in
1999 (compared to the record level experienced in the first quarter of 1998) and
the impact of rising interest rates on sales volume. Insignia Residential Group
reported an EBITDA decline of 36% from $915,000 in 1998 to $581,000 in 1999 as a
result of higher lease expense and support costs, compared to 1998.
23
Internet-Based Business
As noted above, Internet-based business expenses of approximately $1.6
million adversely affected earnings for 1999. These expenses, incurred entirely
in the fourth quarter of 1999, related to the development of new Internet
applications and consisted primarily of costs for personnel and advertising and
marketing campaigns. As previously discussed (see Item 1 - "Internet
Initiatives"), Insignia anticipates such internally developed Internet-based
business models to eventually operate as free-standing enterprises through the
infusion of third-party capital in off balance sheet transactions. At December
31, 1999, Insignia had invested approximately $7.0 million in the development of
capitalized intellectual property for these businesses.
Other Items Affecting Net Income
Administrative expenses rose 64% from $7.2 million in 1998 to $11.8 million
in 1999. This increase reflects the anticipated higher costs following the
Spin-Off as a separate company, continued growth of the Company over the past
year through acquisitions and expansion of services, and certain atypical
expenses incurred in connection with abandoned acquisition transactions.
Administrative expenses of the Company through the time of the Spin-Off in
September 1998, which totaled approximately $5.5 million, consisted entirely of
estimated allocations of Former Parent overhead costs.
Interest expense increased by $6.8 million over 1998 levels to $8.2 million
for the 1999 year. The increase is due principally to interest charges on 1999
credit facility borrowings of approximately $109 million to finance the
acquisitions of Lynch Murphy, St. Quintin and Douglas Elliman. Interest expense
for 1998 was attributable solely to asset financing consisting of Realty One
borrowings, principally under its warehouse line used in the origination of
mortgage loans for sale, and REGL borrowings substantially secured by restricted
cash deposits. The results for 1998 do not include any interest expense
allocation from the indebtedness of Former Parent.
Depreciation and amortization of intangibles (exclusive of property
operations) increased 35% from $22.5 million in 1998 to $30.5 million in 1999.
These increases are the result of increased capital investments in property and
equipment and acquisitions substantially comprised of purchased intangibles.
Results for 1999 were adversely affected by one-time charges of $4.3
million for merger expenses in connection with the acquisition of St. Quintin in
March 1999 and its subsequent combination with REGL. As previously noted, the
one-time charges substantially relate to the provision for costs associated with
vacated excess office space being subleased. Earnings for 1998 were adversely
affected by the one-time impairment charge of $2.3 million for the write-down of
the Company's 60% investment in Insignia/CAGISA (Italy) to the then estimated
disposition value. The Company completed the disposition of its interest in
Insignia/CAGISA in March 1999.
Income taxes declined 6% to $12.2 million in 1999, in comparison to 1998,
as a result of lower pre-tax income.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Insignia reported record service revenues and Net EBITDA for 1998 of $507.4
million and $52.5 million, respectively, representing increases of 72% and 39%,
respectively, over 1997. Net income for 1998 was adversely affected by a
one-time charge of $2.3 million for the write-down of the Company's investment
in Insignia/CAGISA. As a result, net income and net income per share for 1998
declined to $11.1 million and $0.50, respectively.
The acquisitions of REGL (February 1998), Realty One (October 1997) and
Barnes Morris Pardoe & Foster ("Barnes Morris") (October 1997), together with
selective acquisitions of domestic commercial real estate services firms and
further expansion of services in Europe during 1998, through Insignia RE GmbH in
Germany, constituted a majority of these increases. In addition, favorable real
estate markets in the United States and United Kingdom coupled with the
strategic expansion of commercial services in certain key U.S. markets during
1998 contributed to this record growth.
24
Commercial Real Estate Operations
Real Estate Services
Commercial real estate services in 1998 were conducted in the United States
through Insignia/ESG and in Europe through REGL in the United Kingdom, Insignia
RE GmbH in Germany and Insignia/CAGISA in Italy. These businesses produced
service revenue increases of 53% over 1997 to $378.4 million in 1998. The
increase in service revenues attributable to the acquisitions of Barnes Morris,
REGL, Hotel Partners and Jackson Cross was approximately $106.2 million. The
remaining $25 million in revenue growth was attributable primarily to internal
growth and expansion of services. The commercial segment produced EBITDA of
$46.7 million in 1998, which was 16% greater than its 1997 EBITDA.
Insignia/ESG's U.S. operations were led by strong results in the West Coast
and New York metropolitan areas in 1998. The West Coast region reported revenues
of $34.5 million for 1998, or 34% more than 1997 revenues of $25.7 million. This
region exhibited strength across all service lines, as virtually all of the
growth was from internal sources. This strength in the West Coast region was
aided by the launch of brokerage operations in Los Angeles and San Francisco and
by adding a tenant representation component to the existing owner services
business.
The New York metropolitan area enjoyed another strong year, even though the
fourth quarter performance did not reach the record levels achieved in the
fourth quarter of 1997. Service revenues for the New York area were $168.2
million for 1998 compared to $154.9 million in 1997, reflecting Insignia/ESG's
strong presence in this key U.S. market. In the annual ranking of the top New
York deals published in Crain's in February 1999, Insignia/ESG accounted for 19
of the top 50 leasing transactions in 1998, equaling the combined total of the
number two and three firms.
REGL, acquired in February 1998, performed ahead of acquisition date
expectations with the production of $60.9 million of service revenues and EBITDA
of $8.6 million for the period of ownership in 1998.
The foregoing commercial results were achieved in spite of the turmoil in
the U.S. capital markets in the fourth quarter of 1998, which resulted in a
downturn in investment sales activity. Results for the Company's investment
sales businesses, consisting of Insignia Capital Advisors and Hotel Partners,
fell materially short of management expectations in 1998. These businesses
produced revenues, in the aggregate, of only $16.6 million in 1998, which
resulted in a negative EBITDA, before common support costs of Insignia/ESG, of
approximately ($909,000). The significance in these results was that all other
commercial services, including property management, tenant representation,
agency leasing and brokerage, both domestic and international, continued to
provide such strong internal growth that overall results were not negatively
impacted.
Principal Investment Activities
Insignia's real estate investment activities produced an FFO increase of
116% from $804,000 in 1997 to $1.7 million in 1998. This increase was achieved
as a result of the continued strategy of purchasing minority equity interests in
selected real estate assets in partnership with institutional clients, coupled
with operating income growth from existing co-investment properties. During
1998, Insignia co-invested in the purchase of approximately 2.5 million square
feet of commercial property valued at more than $260 million.
Equity earnings from real estate investments reported a loss of $1.9
million for 1998. The difference between real estate FFO and equity earnings
represents depreciation of real estate, gains or losses from sales of property
and provisions for impairment. Results for 1998 reflected real estate
depreciation of $3.6 million, net of gains of approximately $145,000 on the sale
of property.
Residential Real Estate Operations
In 1998, residential real estate services were conducted through Realty One
and Insignia Residential Group. These businesses produced revenue increases of
168% over 1997 to $129.0 million in 1998. This growth was substantially the
result of the October 1997 acquisition of Realty One, which accounted for
approximately $103.3 million, or 20%, of the Company's total service revenues
for 1998. First Ohio Mortgage, Realty One's mortgage loan affiliate, experienced
an increase in loan volume of 41% to $411 million in 1998.
25
Insignia Residential Group produced revenue increases of 5% over 1997 to
$25.7 million in 1998. During 1998, Insignia Residential Group expanded its
mortgage brokerage activities under which the company arranges financing for
cooperative and condominium corporations through third-party financial
institutions. In 1998, Insignia Residential Group arranged approximately $92
million of such financing, reflecting an increase of 85% over 1997.
The residential segment reported EBITDA of $8.9 million for 1998. Virtually
all of the increase over 1997 was a result of the October 1997 acquisition of
Realty One.
Other Items Affecting Net Income
Administrative costs increased by 7% over 1997 to $7.2 million in 1998.
These costs consisted entirely of allocations of Former Parent overhead costs
for the periods prior to the Spin-Off and direct costs of the Company after the
Spin-Off.
Interest expense was $1.4 million in 1998 compared to $318,000 in 1997. The
increase was attributable to asset financing consisting of Realty One borrowings
principally under its warehouse line used in the origination of loans for sale,
REGL borrowings substantially secured by restricted cash deposits and a
non-recourse mortgage note financing a real estate acquisition. The results for
1998 and 1997 do not include any interest expense allocation from the
indebtedness of Former Parent.
Depreciation and amortization, excluding depreciation on real estate
properties, increased 48% to $22.5 million in 1998 compared to $15.2 million in
1997. Amortization of acquisition intangibles, which reported an increase of 41%
or $5.6 million over 1997, was primarily responsible for this rise.
Results for 1998 included an impairment charge of $2.3 million recorded as
a write-down of the Company's 60% investment in Insignia/CAGISA to estimated
disposition value. This write-down reflected the Company's decision to
discontinue and sell its majority interest in its Italian subsidiary. The
Company completed the sale of its interest in Insignia/CAGISA in March 1999.
Income taxes increased at a greater rate than the rise in income before
taxes as a result of the non-deductibility of the aforementioned write-down
together with a $797,000 operating loss of Insignia/CAGISA in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Insignia's liquidity and capital resources consist of its cash on hand,
cash provided from operations and available credit under its $185 million
revolving credit facility. Unrestricted cash at December 31, 1999 was $61.6
million, representing a 15% increase over $53.5 million at December 31, 1998.
Insignia generated cash flows from operating activities of $64.8 million for the
1999 year, an 81% increase over $35.9 million in 1998. In addition to operating
cash flows, the Company uses Net EBITDA and Net EBITDA less income taxes as
measures of liquidity and working capital provided by operations. The Company
reported Net EBITDA of $58.9 million and $52.5 million for 1999 and 1998,
respectively. Net EBITDA less income taxes was $46.7 million and $39.5 million
for 1999 and 1998, respectively. These results reflect increases of 12% for Net
EBITDA and 18% for Net EBITDA less income taxes in 1999 over 1998.
As compared to net income, these Net EBITDA measures effectively eliminate
the impact of non-cash charges for depreciation, amortization of intangible
assets and other non-recurring charges. Management believes that the
presentation of such supplemental measures enhance a reader's understanding of
the Company's operating performance, as they provide a measure of generated cash
available for use to service debt and for other required or discretionary
purposes.
Insignia's total long-term debt at December 31, 1999 was approximately
$164.3 million. Such long-term debt included approximately $109 million
outstanding on its credit facility, notes issued to sellers of acquired
businesses of $8.9 million, a $6.2 million mortgage warehouse line of credit
(financing single family mortgages held for sale), mortgage notes of $28.5
million on wholly owned real estate assets (which are non-recourse to the
Company) and other debt of subsidiaries totaling $11.7 million.
In February 2000, Insignia raised $25 million through the issuance of
perpetual convertible preferred stock to investment funds advised by Blackacre
Capital Management. The preferred stock pays a 4% annual dividend, payable at
Insignia's option in cash or Common Stock, and is convertible into the Company's
Common Stock at the
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option of the holder at $14 per share, subject to adjustment. Insignia will
utilize this capital for general corporate purposes and to fund ongoing Internet
initiatives and real estate investing.
In March 2000, Insignia completed a $36 million private equity financing
through its EdificeRex subsidiary. EdificeRex sold 4,595,349 shares of its
Series C Preferred Stock, representing an approximately 14% equity interest in
the company, for $7.81 per share to a group of approximately 20 investors.
Following the financing, Insignia owns approximately 51% of EdificeRex, with the
remainder owned by management, employees and strategic real estate and operating
partners.
Insignia expects that its other internally developed Internet-based
businesses will raise third-party capital to fund ongoing operations in a
similar manner as the EdificeRex financing.
Fluctuations in elements of working capital are partly attributable to the
generation of revenues that are transactional in nature and therefore affected
by seasonality and capital market conditions. Such fluctuations are generally
temporary and minor, with the exception of incentive compensation, because
residential operations generally carry minimal receivables and domestic leasing
commissions in the commercial sector carry a corresponding commission liability
payable to brokers. Incentive compensation is accrued over the course of each
year based upon financial performance and generally paid in the first quarter of
the succeeding year.
Cash flows for capital expenditure requirements, which are not extensive
under normal circumstances, generally consist of periodic computer, furniture
and fixture replacements incurred in connection with acquisitions or other
personnel additions. During 1999, cash flow utilized to fulfill capital
replacement needs of the service businesses totaled over $37.0 million. These
expenditures in 1999, which the Company considers unusually high for its
business, consisted primarily of leasehold improvements and furniture and
fixtures from office relocation and expansion, computer equipment and management
systems, information technology infrastructure costs and internally developed
Internet-based e-commerce capabilities. Over $17 million of the total 1999
capital expenditures pertained to leasehold improvements and the development and
implementation of a single platform accounting and financial system for the U.S.
commercial operations of Insignia/ESG. In addition, over $7 million in capital
expenditures for 1999 related to internally developed Internet-based businesses.
Insignia expects capital expenditures to remain at significant levels throughout
fiscal 2000 due to the continuing development and implementation of such
accounting and financial systems at Insignia/ESG and other principal operating
units. Property and equipment costs, excluding expenditures for further
Internet-based business initiatives and acquisitions, are expected to again
exceed $30.0 million in 2000.
Insignia expects to use cash on hand and cash flow from operating
activities to fund capital expenditures needs, acquisitions (including the
payment of contingent payments earned), real estate investments, Internet
initiatives and to make principal payments on the Company's outstanding
indebtedness. The Company anticipates that its existing sources of liquidity,
including cash on hand, operating cash flows and available credit under its
revolving credit facility, will be sufficient to meet the Company's working
capital and capital replacement needs for the foreseeable future and, in any
event, for at least the next twelve months. The Company's working capital needs
are reassessed on a routine basis and as acquisitions are identified and
pursued.
THE YEAR 2000 ISSUE
The Year 2000 issue relates to the inability of many computer systems to
recognize dates for the Year 2000 and afterward. Systems that use only two
digits to designate a year (e.g., 2000 is entered as "00") can malfunction when
dates are used in processing data and recalling data from storage. The problems
arising from such programming came to be known as "Year 2000" or the "Year 2000
Issue." The effects of the Year 2000 Issue on operations and financial reporting
could range from minor errors to significant system failures or miscalculations
causing disruptions of operations, including such things as a temporary
inability to process transactions, pay invoices or conduct similar routine
business operations without interruption.
To address the Year 2000 Issue, Insignia established an in-house program
team and initiated a comprehensive plan to assess, remediate and test the
Company's internal computer systems, hardware and processes, including key
operational and financial systems. The plan consisted of the following seven key
phases: awareness, inventory, risk assessment, remediation, quality assurance,
implementation and contingency planning. The plan also included steps to verify
that all key customers, suppliers and other third parties with whom the Company
transacts business were taking the necessary measures to ensure their own
readiness and timely implementation. All phases of the Year 2000 readiness plan
were completed as scheduled prior to the end of 1999. To date, Insignia has not
experienced any Year
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2000 Issues with respect to its internal operating systems, customers, suppliers
or other third parties. In addition, Insignia has not experienced any material
loss in 2000 due to the Year 2000 Issue.
As of December 31, 1999, Insignia had spent a total of approximately $3.5
million in connection with addressing the Year 2000 Issue. These expenditures
included the costs of external consultants, internal resources dedicated to
achieving Year 2000 compliance and approximately $1.5 million in capital
expenditures. All costs, other than those amounts for capital expenditures, were
charged to expense as incurred. All costs of addressing the Year 2000 Issue were
funded from operating cash flows and cash on hand. Any additional expenses are
expected to be minimal.
RECENT ACCOUNTING PRONOUNCEMENTS