Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission File Number 1-14373
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)
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. {X}
At March 1, 2001, there were 21,691,064 shares of Common Stock outstanding.
Based on the reported closing price of $13.00 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 $250 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.
Part I
Item 1. Business
ORGANIZATION
Insignia Financial Group, Inc. ("Insignia" or the "Company"), a Delaware
corporation headquartered in New York, New York, is an international real estate
services company with operations throughout the United States and United Kingdom
as well as in continental Europe, Asia and Latin America. Insignia, incorporated
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 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 is (212) 984-8033.
Insignia's real estate service businesses specialize in commercial real
estate services, apartment brokerage and leasing, single-family home brokerage,
mortgage origination, title services, escrow agency services, condominium and
cooperative apartment management, real estate oriented financial services,
equity co-investment and other services. The Company's principal real estate
service businesses are Insignia/ESG, Inc. (U.S. commercial real estate
services), Insignia Richard Ellis (U.K. commercial real estate services),
Douglas Elliman LLC (residential sales and rentals), Realty One, Inc.
(single-family home brokerage and mortgage origination) and Insignia Residential
Group, Inc. (condominium and cooperative apartment management). Insignia
operates other European businesses in Frankfurt, Germany; Milan, Italy;
Brussels, Belgium; Dublin, Ireland; Belfast, Northern Ireland; and Amsterdam,
the Netherlands. Insignia enjoys overall market dominance for commercial and
residential real estate services in New York through the leading market
positions of Insignia/ESG, Douglas Elliman and Insignia Residential Group.
The Company commenced operations in Asia in July 2000 by establishing an
office in Tokyo, Japan and subsequently acquiring Brooke International, a
commercial real estate services company with existing offices in Hong Kong,
China and Thailand, in December 2000. The Company also recently extended its
service capability into Latin America with the March 2001 acquisition of Grupo
Inmobiliario Inova S.A de C.V. ("Inova"), located in Mexico City, and plans to
further extend its Asian platform with the acquisition of Brooke International's
operations in India in early April 2001.
In addition to real estate services, Insignia invests in real estate
assets, through co-investment initiatives with institutional clients, principal
development activities and real estate funds. The Company's real estate service
businesses and real estate investment activities are more fully described below.
REAL ESTATE SERVICES
COMMERCIAL REAL ESTATE SERVICES
The Company's commercial real estate services are performed through
Insignia/ESG in the United States, Insignia Richard Ellis ("IRE") in the United
Kingdom and other Insignia subsidiaries in continental Europe, Asia and Latin
America. The Company's commercial services operations generated aggregate
service revenues of $641.9 million in 2000, or approximately 73% of the
Company's total service revenues and representing substantial gains over $497.8
million in 1999 and $378.4 million in 1998.
United States Operations
The Company's U.S. commercial real estate services operations commenced in
1991 as a division of Former Parent. The move into full-service brokerage
commenced in 1996 with the acquisition of Edward S. Gordon Company Incorporated
and subsequent expansion of brokerage operations nationwide. In the U.S., the
Company is among the leading providers of commercial real estate services, with
leadership positions in the New York metropolitan marketplace and significant
positions in other major markets including Washington, D.C., Philadelphia,
Boston, Chicago, Atlanta, Phoenix, Los Angeles, San Francisco, Dallas and Miami.
The Company's growth in the
1
late 1990's was fueled largely by acquisitions of regional commercial real
estate service companies. However, its growth in 2000 was almost fully achieved
through the organic expansion of its client base. U.S. commercial real estate
services operations comprise the Company's largest business unit, accounting for
approximately 57% of total service revenues for the 2000 year. U.S. commercial
service operations generated service revenues of approximately $500.2 million in
2000, reflecting material growth over $389.2 million in 1999 and $312.9 million
in 1998.
The Company provides a broad spectrum of commercial real estate services
throughout the U.S. 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, development, redevelopment and
consulting services. The Company serves tenants, owners and investors in office,
industrial, retail, hospitality and mixed-use properties, representing 224
million square feet of commercial real estate including 148 million square feet
of office space, 56 million square feet of industrial space, 15 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 companies such as The Irvine
Company, Teachers Insurance and Annuity Association, Chase Manhattan, TA Realty,
Lend Lease and others. During 2000, the Company completed U.S. sales and leasing
transactions totaling in excess of 180 million square feet of commercial real
estate, including more than $5.0 billion of commercial property sales.
Insignia/ESG's major corporate clients include Chase Manhattan, Lehman Brothers,
The New York Times Company, Barclays and Metropolitan Life.
All commercial real estate services in the U.S. are rendered under the
Insignia/ESG brand. The Company prides itself on the consistent, high-quality
delivery of its services across geographic markets, property types and
disciplines and is active to varying degrees in 47 U.S. markets. Specialized
divisions within the U.S. commercial services business are Capital Advisors
(investment sales and financing activities), Hotel Partners (hotel/hospitality
brokerage services) and Commercial Investments Group (fee-development and
redevelopment services).
The Company represents many leading corporations and property owners,
helping them to fulfill their real estate needs in this marketplace. During the
2000 year, Insignia/ESG extended its market-leading position in New York with
participation in 24 of Manhattan's 50 largest office-leasing transactions,
including the top three, according to a list published in the February 2001
issue of Crain's New York Business. This represents the fourth consecutive year
that Insignia/ESG held the number one position in this survey and reflects an
increase from 17 of the top 50 transactions for the 1999 year. In addition,
Insignia/ESG was also responsible for the largest leasing transaction in New
Jersey for the second year in a row and 8 of the top 20, according to the
January 2001 issue of Real Estate New Jersey.
The Company's reputation and success throughout the U.S. serves as the
primary catalyst for growth and expansion of commercial real estate services
both domestically and internationally. The Company's growth strategy combines
targeted acquisitions of companies that offer complementary skill sets as well
as the expansion of servicing capabilities in select markets through broker
recruitment initiatives. Expansion is primarily focused on first tier markets
(those comprising 75 million square feet or more) and secondarily on
opportunities in second tier U.S. and international markets (those comprising 25
million to 74 million square feet). Since May 1998, the Company has completed
acquisitions of commercial real estate service companies in Chicago,
Philadelphia and Boston, and expanded its service capabilities in Los Angeles,
San Francisco, Atlanta and Miami.
United Kingdom and European Operations
The Company's European businesses consist of commercial real estate
operations in the United Kingdom, Germany, Italy, Belgium and the Netherlands.
European operations, which accounted for 16% of Insignia's total service
revenues, produced approximately $141.8 million in service revenues, concluded
more than 66 million square feet of sales and lease transactions and arranged
the sale of more than $9.0 billion in commercial property in 2000. For the 1999
and 1998 years, Insignia's European operations generated service revenues of
$108.6 million and $65.4 million, respectively. The growth in European
operations for 2000 was primarily achieved through the organic expansion of the
Company's client base in the U.K. This expansion was substantially due to the
successful integration in 1999 of Richard Ellis Group Limited ("REGL"), acquired
in 1998, and St. Quintin Holdings Limited ("St. Quintin"), acquired in 1999,
into a single U.K. operation with a leading market position in London. The
British Pound (Sterling) represents the only foreign currency of a material
business operation, as more than 90% of Insignia's foreign operations were
derived in the U.K. for both 2000 and 1999, with services revenues of $132.2
million and $104.6 million, respectively. The continental European businesses
contributed positive results for 2000 with more than $9.5 million of service
revenues. The continental European businesses are expected to provide
2
increasingly meaningful contributions over time through the maturation of
operations and expansion of service capabilities throughout their markets.
The Company's U.K. subsidiary is among the three largest commercial real
estate service providers in the United Kingdom and the largest, based on 25%
market share for leasing activity, in central London. The Company provides
extensive coverage of the entire United Kingdom market through full-service
offices in London, Glasgow, Birmingham, Leeds, Manchester, Liverpool and Jersey,
and holds a minority equity interest in an Irish real estate services company
with offices in Ireland and Northern Ireland through offices in Dublin and
Belfast. The Company's U.K. operation provides broad-ranging real estate
services, including agency leasing, tenant representation, property sales and
financing, consulting, project management, appraisal, zoning and other general
services. The major income components are agency leasing, tenant representation
and property sales and financing. The 2000 year was exceptionally successful for
the U.K. operation, reflecting the full benefit of the 1999 operational merger
of REGL and St. Quintin and a robust real estate market in the U.K.
The combined strength of the Company's subsidiaries in New York and London
gives Insignia a commanding position in two of the world's most important global
business centers. The U.S. and U.K. operations have benefited from transatlantic
cross-selling opportunities, which are expected to grow in impact over time, in
light of the global business environment and the prominence of New York and
London as world financial capitals.
The U.K. operations are viewed as the springboard for the Company's
continued global expansion of the commercial real estate services platform.
Since the initial acquisition of REGL in February 1998, the U.K. operations have
assisted in the establishment of service operations in Frankfurt, Germany,
Milan, Italy, Brussels, Belgium and Amsterdam, the Netherlands.
Asian Operations
The Company launched operations in Asia during 2000 with the establishment
of an office in Tokyo, Japan in July 2000 and the acquisition of Brooke
International, a Hong Kong based commercial real estate services company, in
December 2000. The Tokyo operation serves the Company's clients throughout
Japan.
Brooke International, founded in 1988, employs approximately 80 real estate
professionals and support personnel in four offices in Hong Kong, China, and
Thailand. The acquisition provides the Company with an ideal platform from which
to serve existing clients in Asia, particularly in corporate real estate
services and investment business, and should also create cross-selling
opportunities with the U.S., U.K. and continental European businesses. Insignia
expects to expand its Asian operations with the acquisition of Brooke
International's operations in India in early April 2001 and anticipates further
expansion in Asia as additional attractive opportunities are identified.
Commercial Services
The full range of commercial services provided by the Company world-wide
include the following:
Tenant Representation-- 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-- sale or acquisition of all types of commercial property
on behalf of owners
Mortgage Financing -- arrangement of financing (either debt or equity) on
behalf of owners of all types of commercial properties
Agency Leasing -- 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 sometimes involve specialized services
such as construction management, engineering or energy management
3
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
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 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.
The Company'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, the Company 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
The consensus forecast for the U.K. economy projects the slowdown of
overall growth in the commercial real estate sector in 2001 (compared with
2000), while overall growth in the Euro based economies is expected to remain at
levels relatively consistent with the 2000 year. After very strong activity in
2000, occupational demand in Southeast England will moderate, especially in the
information technology and telecommunications sectors; however, the market will
remain tightly supplied due to limited new development for office space. The
global slowdown and reduced dynamism in technology sectors are likely to lower
the pressure of demand over the course of 2001 in some European markets, causing
leasing activity to decline.
4
Competitive Position/Competition
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 recognition of the Company's brand names
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 cross-selling
opportunities
o extensive property services portfolio, which provides
significant economies of scale
o proven mergers and acquisitions capability
o market leadership in two of the world's most important
financial centers-- New York and London
o focus on attracting, retaining, supporting and promoting the
highest quality, most skilled personnel in the industry
U.S. Commercial Real Estate Services
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 the Company 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. The
Company 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. The Company 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, the Company has an
outstanding track record in completing major tenant representation assignments.
Over the last two years, the Company, as tenant representative, has arranged
major transactions for such well-known entities as the following: Chase
Manhattan, Lehman Brothers, Credit Suisse First Boston, John Wiley & Sons,
Barclays, Global Crossing, Marsh & McLennan, Winstar Communications, Martha
Stewart Enterprises, Waterhouse Securities and Citigroup.
As previously noted, the Company participated in the top three
office-leasing transactions and 24 of Manhattan's 50 largest office-leasing
transactions for the 2000 year according to a list published in the February
2001 issue of Crain's New York Business. Insignia's creativity and
transaction-structuring expertise have been recognized by a leading trade group,
which annually recognizes two New York City transactions as its "Deals of the
Year." The Company has been the recipient of such awards in four of the past
five years. The Company believes that its outstanding track record provides a
distinct competitive advantage.
Competition for third-party commercial property services is based
principally on cost and the quality of service, including the ability to enhance
asset values. The Company's personnel are experienced in managing a wide variety
of property types in locations throughout the country. This enables Insignia to
offer an owner of a large diversified portfolio the ability to obtain
experienced management for most or all of its properties through one
organization. The Company believes that it has demonstrated an ability to
effectively manage, lease and improve the value of
5
properties. In addition, the Company believes that it has developed a reputation
for quality service and attention to detail for clients, investors and tenants
alike. The Company also believes that its economies of scale and
state-of-the-art management information systems 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, the Company is able to control operating costs by spreading fixed
overhead expenses across its large service base, which enhances profitability
and enables Insignia to pass cost savings on to the property owners for which it
provides services. Major property owner clients include The Irvine Company, Lend
Lease, Chase Manhattan and Teachers Insurance and Annuity Association.
U.K Commercial Real Estate Services
Competition is also intense among commercial service providers in the U.K.
With 2000 revenues of $132.2 million, the Company's U.K. subsidiary has
established itself as a market leader with a "top three" position in the U.K. in
commercial property markets, along with DTZ and Jones Lang Lasalle. The Company
has also achieved the number one position in the highly competitive central
London market for leasing services for 2000 (according to a survey published in
the March 3, 2001 issue of Estates Gazette), surpassing several long entrenched
competitors. The Company believes that its U.K. subsidiary's operations and
reputation place Insignia at a strategic advantage over other primary
competitors including CB Hiller Parker, Knight Frank, Cushman & Wakefield and
FPD Savills.
RESIDENTIAL REAL ESTATE SERVICES
The Company's residential real estate services are performed in the U.S.
through the collective operations of Douglas Elliman, Realty One and Insignia
Residential Group.. Through these businesses, the Company provides a diversified
array of residential real estate services throughout northern Ohio and the New
York metropolitan area including apartment brokerage and leasing, single-family
home brokerage, mortgage origination, title services, escrow agency services and
condominium and cooperative apartment management. The Company's residential
services operations generated aggregate service revenues of $233.2 million in
2000, or approximately 27% of the Company's total service revenues and
representing material gains over $180.7 million in 1999 and $129 million in
1998.
Residential Sales and Rentals
Through Douglas Elliman, founded in 1911 and acquired by Insignia in June
1999, the Company 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 according to the annual ranking in the March 2001 issue of Crain's New
York Business. In addition, Douglas Elliman operates in upscale suburban markets
through offices in Greenwich and Darien, Connecticut, Bernardsville/Basking
Ridge, New Jersey, and Long Island (Manhasset, Locust Valley and Port
Washington/Sands Point). Douglas Elliman has more than 900 brokers, supported by
130 corporate employees in 15 offices in the New York City area. In 2000,
Douglas Elliman's apartment brokerage and leasing business closed transactions
valued at over $2.8 billion and generated service revenues of approximately
$107.5 million, or 12% of the Company's total service revenues for 2000.
6
Single Family Home Brokerage and Mortgage Origination
Through Realty One, established in 1953 and acquired by Former Parent in
October 1997, the Company operates a full-service single-family residential
brokerage, mortgage origination and title insurance business headquartered in
Cleveland and having offices throughout northern Ohio. Realty One's current
business operation is the result of nearly 60 separate mergers and acquisitions.
Realty One's operations constitute the largest residential real estate brokerage
firm in Ohio and the fourteenth largest (based on unit volume) in the United
States according to Real Trends "Big Brokers Report" published in May 2000.
Realty One employs approximately 1,500 sales associates and 600 corporate and
support staff located in 46 offices throughout northern Ohio and represents more
than 100 residential builders. For 2000, Realty One participated in residential
sales transactions valued at nearly $3 billion. Realty One's residential
services operation produced $99.2 million in service revenues for 2000,
accounting for approximately 11% of the Company's total service revenues.
The Company, through the combined businesses of Douglas Elliman and Realty
One, operates the tenth largest residential brokerage operation in the United
States, with more than 25,000 transactions valued at approximately $5.8 billion
for the 2000 year.
Cooperative and Condominium Management
Through Insignia Residential Group, acquired by Former Parent in September
1995, the Company operates the largest manager of cooperatives, condominiums and
rental apartments in the New York metropolitan area, according to a survey in
the February 2001 issue of The Cooperator. Insignia Residential Group provides
full service third-party fee management for more than 300 properties, comprising
in excess of 60,000 residential units, and employ's over 300 people located in
offices throughout the greater New York metropolitan area. 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. 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. In addition
to property management, Insignia Residential Group also offers mortgage
brokerage services, including resale and financing arrangements for cooperative
and condominium corporations through third-party financial institutions.
Insignia Residential Group's residential management and mortgage brokerage
business generated total service revenues of $26.5 million in 2000, representing
approximately 3% of the Company's service revenues for the year.
Residential Services
The residential services provided by the Company include the following:
Residential Brokerage -- 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
Leasing -- marketing of available space on behalf of owners/landlords of
properties and the consummation of leases with tenants
Rental Brokerage -- 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 (including 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 -- convenient and competitive mortgage services to
single family residential customers and many other brokerages throughout
northern Ohio. The Company represents more than 15 mortgage lenders in northern
Ohio, each offering multiple financial products
7
Title Services -- complete title services to single family residential
brokerage customers which 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-- 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, the
Company 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 -- mortgage brokerage services including resale
and financing arrangements for customers through third-party financial
institutions
Market Trends
The residential brokerage industry is currently defined by several key
trends, including the following: market compression; market fragmentation; and
consolidation. Profit margins are being compressed primarily as a result of
increasing splits paid to real estate agents and rising marketing costs in
response to increased market competition. There are more than 50,000 residential
brokerage companies in the U.S., one quarter of which are currently estimated to
be unprofitable, according to various industry research studies. 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 residential brokerage industry has been consolidating for some time.
Through the exceptional brand names of Realty One and Douglas Elliman, the
Company believes it is in a position of strength to enhance Insignia's market
leading positions in northern Ohio and New York and to expand into other markets
through attractive acquisitions and the extension of service capabilities.
Opportunities exist to increase profit margins through the expansion of
services into related areas, such as mortgage, escrow, title, valuation and
renovation services that 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.
Competitive Position/Competition
The Company believes its competitive strengths in the residential real
estate marketplace include the following:
o exceptional reputation and recognition of the Company's
residential brand names
o market leadership in the Company's principal residential
markets-- New York and northern Ohio
o superior service capability due to geographic reach in the New
York and northern Ohio markets
o leading edge use of information technology platforms tailored
to the specific needs of residential clients
o full range of residential services and innovative marketing
practices
8
Residential Sales and Rentals
Through Douglas Elliman, the Company 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 clear market advantages over its competitors, most notably The Corcoran
Group and Brown Harris Stevens, based on its size, geographic reach in the New
York marketplace and its alignment alongside the Company's other New York
operations of Insignia/ESG and Insignia Residential Group.
Single Family Home Brokerage and Mortgage Origination
Through Realty One, the Company accounts for approximately 28% of
single-family home sales or listings within the northern Ohio residential
market. The number two firm, Smythe, Cramer Company, is responsible for
approximately 19% of 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.
Realty One's marketing practices are spearheaded by its marketing plans,
which include "Welcome Home For First Time Buyer" and Relocation value package
programs. These programs include discounts and other promotional items from
various national vendor participants including various appliance companies,
Glidden Paints, Carter Lumber and Royal Dirt Devil Vacuums. To benefit from
these marketing programs, consumers are required to use the brokerage and
mortgage origination or title services offered by Realty One and its
subsidiaries. In addition, first time buyers receive a free home warranty and a
free home inspection with a combined value in excess of $700 when they elect to
use the services of Realty One's mortgage origination subsidiary, First Ohio
Mortgage. The Company believes that the value of the free home warranty and free
home inspection combined with the discounts and other promotional items give
Realty One a significant competitive advantage over its peers.
Cooperative and Condominium Management
Through Insignia Residential Group, the Company operates the market leading
cooperative and condominium management business in the New York metropolitan
area. 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 provider's 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 a market 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.
REAL ESTATE PRINCIPAL INVESTMENT ACTIVITIES
Co-investment and Development
Insignia pursues opportunities to invest in operating real estate assets.
The Company identifies investment opportunities for select clients and invests
alongside of those clients in the purchase of qualifying properties.
Co-investment partners include Walton Street Real Estate Fund III, Citibank, ING
Barings, Blackacre Capital Management, The Witkoff Group, Lennar, Lone Star
Opportunity Fund, Prudential, GE Investments and Whitehall Street Real Estate.
As of December 31, 2000, Insignia held ownership in 33 co-investment
partnerships totaling over 9.2 million square feet of commercial property and
over 4,700 multi-family apartment and hotel units. The Company's ownership
interests in these partnerships range from 1% to 30%.
At December 31, 2000, the Company also was the sole owner of four
properties with an aggregate real estate carrying value of approximately $57.6
million at December 31, 2000. These properties, which are consolidated in the
Company's financial statements, include the following:
o Brookhaven Village - 155,000 square foot retail facility
located in Norman, Oklahoma
o Dolphin Village - 136,000 square foot retail facility located
in St. Petersburg, Florida
9
o One Telecom - 226,000 square foot office property located in
Richardson, Texas and originally developed by Insignia
o Sun Microsystems - 91,000 square foot office property located
in Hillsboro, Oregon and currently under development
In addition, the Company holds a 25% interest in an office property under
development; owns 30% interests in two parcels of land held for development; and
solely owns one parcel of land also held for development. Development activities
on these properties are being directed by Insignia and are not expected to be
complete until later in 2001 or thereafter.
Insignia Opportunity Trust
In 1999, Insignia sponsored the formation of a private real estate
investment trust ("REIT"), Insignia Opportunity Trust ("IOT"). Through its
subsidiary operating partnership, Insignia Opportunity Partners ("IOP"), IOT
invests primarily in secured real estate debt instruments and, to a lesser
extent, in other real estate debt and equity instruments, with a focus on below
investment grade commercial mortgage-backed securities.
At formation, IOT received aggregate capital commitments of $71 million (of
which $9 million was committed by Insignia and the remainder committed by
third-party investors), which IOT in turn committed to invest in IOP in exchange
for an 88.75% general partner interest in IOP. Insignia also committed to invest
an additional $1 million directly in IOP in exchange for (i) a 1.25% managing
general partner equity interest and (ii) a 10% non-subordinated promoted equity
interest in IOP. Through December 31, 2000, the IOT investors had funded
approximately $52.3 million of their aggregate commitments (including $6.6
million funded by Insignia) and Insignia had funded approximately $737,000 of
its capital commitment to IOP, resulting in an Insignia ownership interest of
approximately 12% in IOT and 11% in IOP. Funding of the remaining capital
commitments is to be completed during 2001.
INTERNET INITIATIVES
In late 1999, Insignia's launched an Internet strategy involving an
extensive array of e-commerce initiatives and strategic alliances, including
internally developed Internet-oriented businesses and equity investments in
third-party businesses, seeking to capitalize on Internet-related opportunities
primarily in the real estate industry. In the aggregate, the Company invested
approximately $45 million in Internet and technology-related businesses in 1999
and 2000, including approximately $18.7 million of operating costs expensed
during the periods. These Internet initiatives have been a disappointment,
primarily due to the evaporation of equity financing for Internet technology
initiatives in the second half of 2000. As a result, the Company has reevaluated
its approach to e-commerce and Internet-based initiatives, ultimately deciding
to sell, merge or terminate the majority of its internally developed
internet-based businesses and to substantially cease equity financing activities
with third-party Internet-based businesses. A driving force behind these
decisions was the Company's desire to eliminate all on-going exposure to the
financial requirements associated with such Internet-based initiatives.
Consequently, the Company incurred aggregate net pre-tax losses of $34.7 million
in 2000 related to Internet initiatives, including impairment write-downs of
$18.4 million (including both internal initiatives and third-party investments)
and aggregate net operating losses of $16.3 million.
At December 31, 2000, Insignia held remaining equity investments of
approximately $10.5 million (after approximately $8 million of impairment
write-offs) in third-party Internet-related businesses. Insignia's equity
ownership in these businesses ranges from 1% to 10%. While these businesses
continue to operate, their future performance is highly dependent upon the
ability to raise incremental capital to fund the on-going development of their
business plans. If they are unsuccessful in raising the necessary capital,
Insignia could incur further losses from impairment write-offs.
During the first half of 2000, Insignia consolidated EdificeRex.com, Inc.
("EdificeRex") and recorded losses of approximately $9.3 million, or $3.2
million in excess of the Company's investment. EdificeRex, launched in February
2000, represented Insignia's first internally developed Internet-based business
and was de-consolidated, beginning with the third quarter of 2000, due to a
restructuring which reduced the Company's voting interest to 47%. The
restructuring did not affect Insignia's ownership in EdificeRex, as the Company
continues to hold an economic interest of approximately 50%. The $3.2 million
excess loss is carried as a deferred credit on the Company's balance sheet until
such time as EdificeRex achieves profitability or Insignia disposes of its
interest in EdificeRex.
10
The Company has no obligation or intention to provide additional funding to
EdificeRex. All other internal Internet-based operations were terminated at
December 31, 2000, resulting in a $10.4 million impairment write-off of
capitalized development costs.
The Company has no intention of making any material investments in Internet
technology initiatives other than certain Internet-related platforms developed
or invested in by Project Octane, the industry consortium comprised of Insignia,
CB Richard Ellis, Jones Lang LaSalle and Trammel Crow.
2001 OUTLOOK
The Company's core real estate service businesses continue to perform well.
In fact, while predictions of material softening emanate from the economic
community, the Company has not yet experienced any meaningful negative impact on
the service businesses. That said, the Company believes that the extraordinary
operating levels experienced in 2000 are unlikely to continue at the same pace
in 2001. However, in light of the eradication of $34.7 million of
Internet-related losses and an expected material reduction in capital
expenditures, Insignia expects overall capital invested in our businesses in
2001 to decline significantly from year 2000 levels. Thus, while it may be
unlikely for the Company to surpass the robust operating performance in 2000 for
the service businesses, expectations for 2001 call for financial results
surpassing any year in Insignia's or its Former Parent's history other than
2000. If 2001 expectations are met, the reduction in technology related
investments, both e-commerce initiatives and business capital expenditures,
should result in increased operating cash flow. In any event, the Company
expects 2001 to be another solid year, on the back of tremendous growth and
performance in 2000.
In addition to developments in the Company's core service businesses,
Insignia expects 2001 to be strategically significant. The Company has spent the
last four years developing a global real estate services platform with
meaningful market positions in many major financial centers around the world. At
the same time, Insignia has a proven track record of real estate investing as a
principal, both on and off balance sheet, typically in partnership with our
clients. These activities include the Former Parent's earlier programs involving
limited partnerships as well as the Company's current co-investment,
development, and real estate-oriented debt securities programs. Recently, these
activities have been undertaken either on a one-off basis, utilizing the
Company's own resources in tandem with institutional clients, or occasionally
through the creation of off-balance sheet investment funds, such as IOT.
During 2001, Insignia expects to continue its principal investment
activities and pursue other off balance sheet investment opportunities, similar
in scope to IOT, which would expand the Company's real estate investment
initiatives while at the same time enabling these investment activities to
produce more predictable operating contributions.
ACQUISITIONS
Over the past ten 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 continues to pursue an acquisition strategy that focuses on the
expansion both domestically and internationally, while simultaneously seeking
principal opportunities to invest capital in real estate assets in partnership
with its clients. Such undertakings may be in the areas of commercial and
residential real estate assets and services. Insignia has acquired the following
real estate services businesses since January 1, 2000:
11
Inova
In March 2001, Insignia acquired Inova, a commercial real estate service
company headquartered in Mexico City. Inova provides acquisition advisory
services and due diligence, project coordination and supervision, real estate
valuations, tenant representation, asset management and strategic advisory
services. Inova offers Insignia an operating platform, with quality real estate
professionals, for the expansion of services in Mexico. The base purchase price
was approximately $500,000 and was paid in cash.
Brooke International
In December 2000, Insignia acquired Brooke International, a commercial real
estate service company based in Hong Kong with additional offices in China and
Thailand. The base purchase price was approximately $1.6 million, comprised of
approximately $1.1 million paid in cash and $500,000 in equity. Additional
purchase consideration of up to $1 million, payable over three years, is
contingent on the future performance of Brooke International, which now operates
as Insignia Brooke. Insignia intends to acquire Brooke International's operation
in India in early April 2001.
BDR
In March 2000, the Company entered into a definitive agreement to acquire
BDR, a Dutch real estate services company headquartered in Amsterdam, the
Netherlands. The base purchase price was approximately $2.4 million, all of
which was paid in cash upon final closing in September 2000. BDR provides a
variety of commercial real estate services with a specialization in
international advisory assignments and other corporate services. Additional
purchase consideration of approximately $2.5 million, payable over three years,
is contingent on the future performance of this business, which now operates as
Insignia BDR.
LIFE INSURANCE PROCEEDS
In October 2000, Insignia received $20 million of life insurance proceeds
from a "key man" insurance policy on the life of Edward S. Gordon, a member of
the Company's Office of the Chairman who passed away on September 21, 2000. The
policy was purchased as a part of Insignia's acquisition of Edward S. Gordon
Incorporated in June 1996. Insignia incurred approximately $900,000 in
obligations payable to Mr. Gordon's estate at the time of his passing. The
Company recognized the resulting income of $19.1 million in the third quarter of
2000.
CORPORATE BRANDING
In February 2000, Insignia introduced a worldwide corporate branding
program that established 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.
INDUSTRY SEGMENT DATA
Insignia's operating activities encompass three reportable segments. The
Company's segments include (i) commercial real estate services and principal
investment activities; (ii) residential real estate services; and (iii)
Internet-based e-commerce initiatives. The commercial segment provides services
including tenant representation, property and asset management, agency leasing
and brokerage, investment sales, development, consulting and other services. The
commercial segment also includes the Company's principal real estate investment
activities. Insignia's commercial segment comprises the operations of
Insignia/ESG in the U.S., IRE in the U.K. and other businesses in continental
Europe, Asia and Latin America. The residential segment provides services
including apartment brokerage and leasing, single-family home brokerage
services, property management services, mortgage origination and other services
and is comprised of the operations of Douglas Elliman, Realty One and Insignia
Residential Group. Insignia's Internet initiatives, which were launched in late
1999, involve equity investments in third-party Internet-based businesses and
internally developed business activities. The Company terminated its internally
developed Internet initiatives and substantially ceased equity financing
activities with third-party Internet-based
12
businesses at December 31, 2000. The Company's unallocated administrative
expenses and corporate assets, consisting primarily of cash and property and
equipment, are included in "Other" in the segment reporting.
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.
CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which discusses the SEC's views on the recognition of revenues from
certain transactions. At December 31, 2000, the Company changed its method of
accounting for revenue recognition for leasing commissions, in compliance with
SAB 101, as a cumulative effect of a change in accounting principle, effective
as of January 1, 2000. As such, operating results for the year ended December
31, 2000 are presented in compliance with the requirements of this accounting
change. Historically, the Company generally recognized leasing commissions upon
execution of the underlying lease, unless significant contingencies existed.
Under the new accounting method, adopted retroactive to January 1, 2000, the
Company's leasing commissions that are payable upon certain events such as
tenant occupancy or payment of rent will be recognized upon the occurrence of
such events. While this accounting change affects the timing of recognition of
leasing revenues (and corresponding commission expense), it does not impact the
Company's cash flow from operations.
The cumulative effect of the accounting change for prior years resulted in
a reduction to income for the 2000 year of $30.4 million, net of applicable
taxes of $23.3 million. The effect of the change on the 2000 year was to
decrease revenues by $59.8 million and income exclusive of the cumulative effect
of the accounting change by $10.5 million, or $0.43 per share. The effect of the
change on income for each quarter of the 2000 year is provided in the following
table:
CURRENT PERIOD
NET INCOME (LOSS) EFFECT OF
ON THE BASIS OF ACCOUNTING CHANGE
THE PREVIOUS (NET OF INCOME ADJUSTED INCOME
(In thousands) ACCOUNTING POLICY TAXES) (1)
-------------------------------- -------------------- --------------------- ------------------
2000 NET (LOSS) INCOME:
First quarter 2000 $ (4,312) $ (401) $ (4,713)
Second quarter 2000 2,767 (3,578) (811)
Third quarter 2000 27,028 (3,238) 23,790
Fourth quarter 2000 6,786 (3,265) 3,521
-------------------- --------------------- ------------------
2000 YEAR $ 32,269 $ (10,482) $21,787
-------------------- --------------------- ------------------
(1) Represents adjusted income before cumulative effect on prior years.
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.
13
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 more than 8,000 employees worldwide, 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 40 Chairman of the Board; Chief Executive Officer
Stephen B. Siegel 56 Director; President; Chairman and Chief Executive Officer of Insignia/ESG, Inc.
James A. Aston 48 Chief Financial Officer
Jeffrey P. Cohen 33 Executive Vice President
Frank M. Garrison 46 Office of the Chairman; President of Insignia Financial Services, Inc.
Adam B. Gilbert 48 Executive Vice President; General Counsel; Secretary
Ronald Uretta 45 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.
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.
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. 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.
14
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. 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.
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.
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 $6,940,000 120,000 June 2011
Insignia Richard Ellis Berkeley Square House, London 3,000,000 42,000 June 2003
Realty One 6000 Rockside Woods Blvd., Cleveland, OH 660,000 46,000 June 2005
Douglas Elliman 575 Madison Avenue, New York, NY 635,000 32,000 April 2004
Insignia Residential Group 675 Third Avenue, New York, NY 1,700,000 72,500 January 2009
The Company occupies additional office space in locations throughout the
United States, United Kingdom, continental Europe, Asia and Latin America under
leases expiring at various dates through 2011. Insignia believes its facilities
are adequate for current and future planned uses.
Item 3. Legal Proceedings
ANTITRUST LITIGATION
In 1994, Re/Max International and various franchisees filed suit in federal
court in Ohio against Realty One, alleging claims under the federal antitrust
laws and related state law claims. Re/Max International alleged in its complaint
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.
Re/Max International claimed actual damages of $30 million. The federal
antitrust laws provide for trebling of actual damages.
Insignia acquired Realty One in October 1997. In connection with the
acquisition, the sellers agreed to indemnify the Company for any loss arising
from the Re/Max International litigation up to the amount of the acquisition
price of approximately $40 million. The Re/Max International case was recently
tried before a jury, which resulted in a mistrial. The parties subsequently
settled Re/Max International's claims in July 2000, whereby Realty One agreed to
cease to impose reduced commission splits on the Re/Max plaintiffs, subject to
reinstatement in accordance with the terms of the settlement. In September 2000,
the court entered a judgment against Realty One in
15
the amount of approximately $6.7 million, as agreed to by the parties; however,
also included in its judgment were several terms governing Realty One's conduct
to which the parties had not agreed. Realty One has appealed the court's
judgment. The sellers have funded the initial cash portion of the settlement,
totaling approximately $3.6 million, on behalf of Realty One pursuant to their
indemnification obligations to Insignia and are obligated to fund the remainder
in semi-annual installments over five years. The payment of the first portion of
the judgment was made without prejudice to Realty One's rights of appeal.
LITIGATION CLAIMS
Insignia and certain subsidiaries are defendants in other lawsuits arising
in the ordinary course of business. 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.
INDEMNIFICATION
In 1998, Former Parent entered into a Merger Agreement with Apartment
Investment and Management Company ("AIMCO"), and one of AIMCO's subsidiaries,
pursuant to which Former Parent was merged into AIMCO. Shortly before the
merger, Former Parent distributed the stock of Insignia to its shareholders in a
Spin-Off transaction. As a requirement of the Merger Agreement, Insignia entered
into an Indemnification Agreement with AIMCO. In the Indemnification Agreement,
Insignia agreed generally to indemnify AIMCO against all losses exceeding $9.1
million that result from: (i) breaches by the Company or Former Parent of
representations, warranties or covenants in the Merger Agreement; (ii) actions
taken by or on behalf of Former Parent prior to the merger, and (iii) the
spin-off. The Company also agreed generally to indemnify AIMCO against all
losses, without regard to any dollar value limitation, that result from: (i)
amounts AIMCO paid to employees of Former Parent that were not retained as
employees of AIMCO; (ii) pre-merger obligations for goods, services, taxes or
indebtedness except for those that AIMCO agreed to assume; and (iii) the
businesses of Former Parent that Insignia now owns and operates as a result of
the Spin-Off.
Since the merger transaction in October 1998, there have been no related
claims except for an examination of the federal income tax returns of Former
Parent being conducted by the Internal Revenue Service for the years ended
December 31, 1996, December 31, 1997 and the period ended October 1, 1998. AIMCO
has notified the Company that it is seeking indemnity from Insignia for any
liability as a result of this examination. Insignia agreed to indemnify AIMCO
for taxes, penalties, interest and professional fees for which it is liable as a
result of this audit and has reimbursed approximately $500,000 to AIMCO for
professional fees incurred in connection with the audit. No determinations have
been made or can be made at this time as to any potential tax liability that may
arise as a result of this examination.
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 2000.
16
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
COMMON STOCK
Insignia's Common Stock trades on the New York Stock Exchange under the
trading symbol "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 each quarter of 1999 and 2000:
CALENDAR PERIOD HIGH LOW
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
2000
First Quarter................................................................ 16 5/8 7 9/16
Second Quarter............................................................... 13 3/4 9 3/4
Third Quarter................................................................ 11 1/4 9 3/16
Fourth Quarter............................................................... 11 15/16 9 1/2
The closing sales price for Insignia's Common Stock on March 1, 2001, as
reported on the New York Stock Exchange, was $13.00.
The Company's transfer agent is First Union National Bank of North
Carolina, 1525 West W. T. Harris Boulevard. Suite 3C3, Charlotte, North Carolina
28262. As of March 1, 2001, there were approximately 1,600 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 credit facility.
17
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 2000, approximately 307,000 shares of
Common Stock were sold under this plan at an average price of approximately
$7.75 per share.
Stock Repurchases
At December 31, 2000, Insignia held in treasury 1,502,600 repurchased
shares of its Common Stock. Such shares were repurchased at an aggregate cost of
approximately $16.2 million and are reserved for issuance upon the exercise of
warrants granted in 2000 to certain executive officers, non-employee directors
and other employees of the Company.
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% cumulative 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 stated value, at any time on or after February 15, 2004.
Stock dividends of $475,000 were paid in 2000 through the issuance of 43,417
shares of the Company's Common Stock.
18
Item 6. Selected Financial Data
The following table sets forth selected historical financial data of
Insignia and those Insignia businesses included in the Spin-Off for the years
ended December 31, 2000, 1999, 1998, 1997 and 1996. 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 for the periods prior to the Spin-Off in September 1998
as if Insignia were a separate entity for those entire periods presented. Such
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,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $880,363 $680,348 $507,351 $295,258 $122,005
Income before cumulative effect of a change
in accounting principle 21,787 10,298 11,053 13,055 3,484
Cumulative effect of a change in accounting
principle (30,420) -- -- -- --
Net (loss) income (8,633) 10,298 11,053 13,055 3,484
PER SHARE AMOUNTS - ASSUMING DILUTION (1):
Income before cumulative effect of a
change in accounting principle $ 0.89 $ 0.46 $ 0.50 N/A N/A
Cumulative effect of a change
in accounting principle (1.24) -- -- N/A N/A
Net (loss) income (0.35) 0.46 0.50 N/A N/A
OTHER DATA:
Cash provided by operating activities $ 82,141 $ 64,810 $ 35,857 $ 31,370 $ 11,203
Cash used in investing activities (81,436) (165,844) (128,140) (87,667) (81,090)
Cash provided by financing activities 62,891 109,429 140,194 61,767 69,895
EBITDA (2) 82,291 58,923 48,345 36,633 14,561
Net EBITDA (2) 82,462 60,493 52,502 37,655 14,905
AT DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $124,527 $ 61,600 $ 53,489 $ 5,514 $ 44
Real estate interests 102,170 76,298 58,196 19,454 4,465
Total assets 910,342 795,313 595,489 337,945 171,787
Total debt 193,653 164,322 44,438 19,969 --
Investment and net advances from Former
Parent -- -- -- 208,444 137,777
Stockholders' equity 408,881 393,069 383,243 -- --
(1) Per share amounts for 1997 and 1996 are not presented because Insignia was
not a separate entity during those periods.
19
(2) EBITDA is defined as real estate services revenues less direct expenses and
administrative costs. Net EBITDA is defined as income before depreciation,
amortization, income taxes and non-recurring one-time charges. Neither EBITDA
nor Net EBITDA, as disclosed above, should be construed to represent cash
provided by operations pursuant to generally accepted accounting principles
("GAAP"), as neither is defined by GAAP. Insignia's usage of these terms may
differ from other companies' usage of the same or similar terms. As compared to
net income, these measures effectively eliminate the impact of non-cash charges
for depreciation, amortization of intangible assets and other non-recurring
charges. Management believes presentation of these supplemental measures enhance
a reader's understanding of the Company's operating performance.
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 were determined 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. The selected financial data, as
presented, may not be comparable between periods due to the allocation of
administrative expenses to Insignia for all periods prior to Spin-Off.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
At December 31, 2000, the Company was affected by a change in its method of
accounting for revenue recognition for leasing transactions in compliance with
SAB101. This change was adopted as a cumulative effect of a change in accounting
principle, effective as of January 1, 2000. Approximately $152 million in
previously recognized leasing commissions were removed as a result of this
accounting change. Such leasing commissions will be realized in the future upon
the fulfillment of conditions to commission payment.
The Company's total assets increased by approximately $115 million to
$910.3 million at December 31, 2000. This increase was primarily attributable to
the following items: (i) a $62.9 million increase in cash attributable to the
record transaction levels in the commercial services businesses in combination
with $19.1 million of life insurance proceeds; (ii) investment in property and
equipment and real estate interests; and (iii) a $19.2 million increase in
deferred tax assets. Conversely, assets were lowered by a $14.5 million decline
in receivables, which is the net effect of a $137 million increase in
uncollected commissions on executed lease transactions and the reduction of
approximately $152 million in commissions receivables eliminated by SAB101. In
addition, the Company's total assets included costs in excess of net assets of
acquired businesses of $324.6 million and $311.5 million at December 31, 2000
and 1999, respectively, resulting from business acquisitions substantially
comprised of goodwill.
Liabilities increased by approximately $99.2 million to $501.5 million at
December 31, 2000. This reflects a $45.5 million increase in accrued incentives
resulting from exceptional operating performance, a $22.5 million increase in
acquisition payables related to the full achievement of all remaining U.K.
purchase consideration (payable in March 2001), borrowings of $15 million on
available credit facilities and approximately $20 million of borrowings on real
estate mortgage notes (principally to fund Internet initiatives and real estate
development activities). Stockholders' equity increased by $15.8 million to
$408.9 million at December 31, 2000, principally as a result of the $25 million
convertible preferred stock issuance in February 2000, in combination with a net
loss of $8.6 million for 2000. The net loss for 2000 includes income of $21.8
million before the impact of the cumulative effect of SAB101 on prior years
totaling $30.4 million (net of applicable taxes).
20
RESULTS OF OPERATIONS
ACCOUNTING CHANGE
The Company's financial results for 2000 were affected by the change in its
method of accounting for revenue recognition for leasing commissions in
compliance with SAB 101, Revenue Recognition in Financial Statements. The
adoption of SAB 101 is reflected as a cumulative effect of a change in
accounting principle as of January 1, 2000. Under SAB101, the Company's leasing
commissions that are payable upon certain events such as tenant occupancy or
payment of rent will be recognized upon the occurrence of such events.
Historically, Insignia generally recognized leasing commissions upon
execution of the underlying lease, unless significant contingencies existed.
While this accounting change affects the timing of recognition of leasing
revenues (and corresponding commission expense), it does not impact the
Company's cash flow from operations. Financial results for the year ended
December 31, 2000 are adjusted retroactive to the beginning of the year in
compliance with the requirements of this accounting change. The impact of this
accounting change on the 2000 year is provided in the following table:
SERVICE NET INCOME
(In thousands) REVENUES EBITDA (LOSS)
- -------------------------------------------------------- ----------------- ---------------- ----------------
OPERATING RESULTS - PREVIOUS BASIS OF ACCOUNTING $ 934,931 $ 100,581 $ 32,269
SAB101 EFFECT:
First Quarter 2000 (4,936) (693) (401)
Second Quarter 2000 (16,659) (6,184) (3,578)
Third Quarter 2000 (17,550) (5,597) (3,238)
Fourth Quarter 2000 (20,635) (5,645) (3,265)
----------------- ---------------- ----------------
Year 2000 Effect (59,780) (18,119) (10,482)
----------------- ---------------- ----------------
OPERATING RESULTS - BEFORE CUMULATIVE EFFECT 875,151 82,462 21,787
----------------- ---------------- ----------------
Cumulative Effect - January 1, 2000 (30,420)
-- --
----------------- ---------------- ----------------
OPERATING RESULTS - AFTER ACCOUNTING CHANGE $ 875,151 $ 82,462 $ (8,633)
================= ================ ================
The cumulative effect of the accounting change on prior years resulted in a
reduction to income for 2000 of $30.4 million (net of applicable taxes of $23.3
million), or $1.24 per share. The effect of retroactive application of the
accounting change to January 1, 2000 lowered service revenues by $59.8 million,
Net EBITDA by $18.1 million and income before the cumulative effect of the
accounting change by $10.5 million, or $0.43 per share, for the 2000 year.
On a pro forma basis, giving effect to the change retroactive to January 1,
1999, the Company would have reported service revenues of $656.7 million, Net
EBITDA of $47.9 million, and net income of $3.2 million for the 1999 year.
Actual results reported for 1999 included service revenues of $678.5 million,
Net EBITDA of $60.5 million and net income of $10.3 million.
2000 YEAR
For 2000, Insignia reported substantial growth in all financial measures as
service revenues grew 29% to $875.2 and Net EBITDA grew 36% to $82.5 million,
compared to 1999. Income from real estate operations grew sharply to $23.1
million for 2000, reflecting a gain of 61% over $14.4 million for 1999. These
operating results were fueled by vigorous organic growth in the Company's U. S.
and European commercial real estate services operations and full year
contributions from Douglas Elliman (acquired in June 1999) and St. Quintin
(acquired in March 1999). It is significant that more than 80% of the growth in
revenues and Net EBITDA was from internal means, driven by greater market share
and extremely robust real estate economies. These results were achieved despite
the lowering effects of the SAB101 accounting change on certain leasing
transactions.
21
The Company's net earnings for 2000 were favorably impacted by income of
$19.1 million from life insurance proceeds and $1.4 million in foreign currency
transaction gains, principally from facility borrowings in declining European
currencies. Conversely, income for 2000 was adversely affected by pre-tax
Internet losses totaling $34.7 million and including $18.4 million in impairment
write-downs of the Company's internally developed businesses and certain third
party investments. Further, as noted above, the effects of the SAB101 accounting
change materially lowered 2000 earnings.
As a result of the foregoing, the Company reported income before cumulative
effect of a change in accounting principle of $21.8 million for 2000,
representing a significant increase of 112% over $10.3 million for 1999. On a
per share basis, such earnings represented $0.89 for 2000 compared to $0.46 for
1999. The Company reported a net loss of $8.6 million for 2000, after the $30.4
million cumulative effect of a change in accounting principle. The cumulative
effect lowered earnings per share by $1.24 to ($0.35) for the 2000 year.
The comparative results for the 1999 year were marked by the first quarter
shortage of brokerage transactions in the aftermath of the late 1998 capital
markets turmoil and the $4.3 million ($3.1 million net of tax benefit) provision
for merger related expenses incurred in connection with the acquisition of St.
Quintin and its merger with REGL.
Weighted average fully diluted common shares increased 8% for 2000 due to
the assumed conversion of 4% convertible preferred stock issued in February
2000, along with the additional dilutive effect of assumed stock option and
warrant exercises resulting from a 37% rise in the Company's stock price during
the 2000 year.
In addition to net income, Insignia uses EBITDA (defined as real estate
services revenues less direct expenses and administrative costs) and Net EBITDA
(defined as income before depreciation, amortization, income taxes and
non-recurring one-time charges) as indicators of the Company's financial
performance. Neither EBITDA nor Net EBITDA, as disclosed above, should be
construed to represent cash provided by operations pursuant to generally
accepted accounting principles ("GAAP"), as neither is defined by GAAP.
Insignia's usage of these terms may differ from other companies' usage of the
same or similar terms. As compared to net income, these measures effectively
eliminate the impact of non-cash charges for depreciation, amortization of
intangible assets and other non-recurring charges. Management uses these
supplemental measures to evaluate operating performance and in making financial
decisions and believes the presentation of such measures enhance a reader's
understanding of the Company's operating performance as they provide a measure
of generated cash.
The results of operations for the Company are more fully described below.
22
The following table sets forth certain items derived from the Company's
consolidated statements of operations for the years ended December 31, 2000,
1999 and 1998, respectively.
YEAR ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
(In thousands)
REAL ESTATE SERVICES REVENUE:
Insignia/ESG $ 500,152 $ 389,208 $ 312,940
Europe 141,752 108,562 65,422
Residential 233,247 180,701 128,989
--------------- ------------ ---------------
Total real estate revenues 875,151 678,471 507,351
--------------- ------------ ---------------
COST AND EXPENSES
Real estate services 776,505 607,722 451,774
Administrative 16,355 11,826 7,232
--------------- ------------ ---------------
EBITDA - REAL ESTATE SERVICES (1) 82,291 58,923 48,345
Real estate FFO (2) 3,877 3,758 1,735
Interest and other income (3) 7,990 5,191 3,429
Foreign currency transaction gains 1,365 827 --
Interest expense (13,061) (8,206) (1,378)
Minority interests -- -- 371
--------------- ------------ ---------------
NET EBITDA (1) 82,462 60,493 52,502
Applicable income tax (17,223) (12,858) (12,975)
--------------- ------------ ---------------
NET EBITDA AFTER TAX 65,239 47,635 39,527
Gains on sale of real estate 3,884 2,767 --
Real estate impairment (1,806) -- --
Tax on real estate (831) (1,107) --
Depreciation - FF&E (12,391) (6,644) (3,090)
Amortization of intangibles (25,894) (23,823) (19,453)
Depreciation - real estate (5,125) (4,465) (3,631)
--------------- ------------ ---------------
(43,410) (34,932) (26,174)
--------------- ------------ ---------------
INCOME FROM REAL ESTATE OPERATIONS 23,076 14,363 13,353
Merger related and non-recurring charges -- (4,272) (2,300)
Life insurance proceeds 19,100 -- --
Internet-based businesses, net (14,993) (1,580) --
Internet impairment write-downs (18,435) -- --
Internet depreciation (1,288) -- --
Income tax benefit 14,327 1,787 --
--------------- ------------ ---------------
(1,289) (4,065) (2,300)
--------------- ------------ ---------------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 21,787 10,298 11,053
--------------- ------------ ---------------
Cumulative effect of a change in
principle (30,420) -- --
--------------- ------------ ---------------
NET (LOSS) INCOME $ (8,633) $ 10,298 $ 11,053
=============== ============ ===============
(1) Neither EBITDA nor Net EBITDA, 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. As compared to net income, the EBITDA and Net EBITDA
measures effectively eliminate the impact of non-cash charges for depreciation,
amortization of intangible assets and other non-recurring charges. Management
23
believes that the presentation of these supplemental measures enhance a reader's
understanding of the Company's operating performance as they provide a measure
of generated cash.
(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. This measure is not defined by GAAP and Insignia's
usage of this term may differ from other companies' usage of the same or similar
terms. Management uses this supplemental measure in the evaluation of principal
real estate investment activities and believes that it provides a measure of
generated cash flows for the Company's real estate operations.
(3) Interest and other income for 2000 excludes $464,000 of interest income of
EdificeRex, which is reflected in Internet-based businesses.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Real Estate Services
Commercial Real Estate Services
During 2000, Insignia's commercial real estate service operations included
Insignia/ESG in the United States, IRE in the United Kingdom, other businesses
in Germany, Italy, Belgium, the Netherlands and Asia. For 2000, these commercial
businesses produced aggregate service revenues of $641.9 million and EBITDA of
$82.5 million, reflecting gains of 29% for revenues and 46% for EBITDA, as
compared to 1999. These results for 2000 reflect year-over-year growth pursuant
to the SAB101 accounting change, which materially understates actual growth over
1999 on a comparable basis. Growth achieved for 2000 would have been 41% to
$701.2 million for service revenues and 78% to $100.4 million for EBITDA, had
adoption of SAB101 not been required. Alternatively, assuming SAB101 were
adopted for both 2000 and 1999 years, commercial real estate service operations
would have produced year-over year gains of 35%, or $165.8 million, for service
revenues and 88%, or $38.7 million, for EBITDA. Commercial real estate services
produced approximately 73% and 84%, respectively, of Insignia's total service
revenues and EBITDA (before unallocated administrative costs) for 2000.
Substantially all of the revenue and EBITDA gains in 2000 were from organic
growth, reflecting the Company's continued success in securing assignments from
new and existing commercial real estate customers in both the United States and
Europe. The Company's Asian operations were launched in December 2000 with the
acquisition of Brooke International.
The 2000 year was an extraordinary period for the U.S. commercial real
estate services operation. The Company's well developed U.S. commercial service
delivery platform (which is well entrenched in most major central business
districts) and the continuation of strong economic conditions propelled
operating performance to record levels. For 2000, the Company generated U.S.
commercial service revenues of $500.2 million and EBITDA of $56.7 million,
representing material gains of 29% for revenues and 36% for EBITDA, compared to
1999. U.S. commercial leasing activity remained strong across the board, with
all Insignia/ESG regions contributing to the revenue and EBITDA growth for the
year. It is noteworthy to add that the year-over-year domestic gains were almost
entirely attributed to organic growth.
The New York region, the Company's largest market, continued to produce
exceptional operating results, generating more than 50% of the Company's total
U.S. commercial services revenue and EBITDA for 2000. The Company participated
in 24 of Manhattan's 50 largest office-leasing assignments of 2000, including
the top three deals overall, according to the annual list published by Crain's
New York Business in February 2001. This represents the fourth consecutive year
in which Insignia/ESG claimed the top position on this list, and the 24
assignments are the highest annual total over that period.
In Europe, financial results for the 2000 year were also significant with
reported services revenues of $141.8 million and EBITDA of $25.9 million. Such
operating results reflected revenue gains of $33.2 million, or 31%, and EBITDA
gains of $11.1 million, or 76%, over 1999. The 2000 year was one of the most
successful years in IRE's history with operating results reflective of the full
benefits of the 1999 merger with St. Quintin. The Company, through IRE, achieved
the number one market position in central London, with responsibility for more
leasing activity than any other firm. As evidence, the Company's U.K. operation
generated service revenues and EBITDA of $132.2 million and $24.6 million,
respectively, for 2000. These operating results represented growth of 26% in
revenues and 66% in EBITDA compared to 1999. The Company's continental European
businesses produced
24
aggregate service revenues and EBITDA of $9.6 million and $2.1 million (before
European administrative expenses), respectively, for 2000. These results, which
represented gains over 1999 of $5.5 million for revenues and $1.7 million for
EBITDA, were attributable primarily to marked improvement in Germany together
with positive contributions from the Netherlands operations, acquired in March
2000.
Residential Real Estate Services
The Company's residential real estate services operations, comprised of
Realty One, Douglas Elliman and Insignia Residential Group, generated aggregate
service revenues and EBITDA of $233.2 million and $16.1 million, respectively,
for 2000. This operating performance represented revenue gains of 29% and EBITDA
gains of 12% over 1999 and was entirely attributable to contributions from the
full year of operations for Douglas Elliman. Residential operating results were
adversely affected by soft demand for housing and declines in refinancing
activities in northern Ohio primarily due to higher mortgage interest rates. For
2000, Realty One's service revenues declined 5% to $99.2 million and EBITDA
declined 39% to $4.5 million compared to 1999. For the 2000 year, Realty One's
mortgage origination business experienced declines of approximately 21% in
mortgage volume. Douglas Elliman produced service revenue and EBITDA of $107.5
million and $11.2 million, respectively, for the 2000 year. These operating
results represented material increases of $57.8 million, or 116% for revenues
and $4.8 million, or 75%, for EBITDA, compared to 1999. Insignia Residential
Group produced relatively flat operating results for 2000, compared to 1999,
generating service revenues of $26.5 million and EBITDA of $452,000. The
comparable results for 1999 were service revenues of $26.9 million and EBITDA of
$581,000.
Real Estate Principal Investment Activities
The Company's strategy of investing in qualifying real estate assets
continued to produce positive contributions to the commercial business. The
Company reported equity earnings from real estate ventures of approximately $1.5
million for 2000, reflecting a decline of 36% compared to $2.3 million for 1999.
This decline is primarily attributable to $1.8 million in impairment write-downs
on two under-performing assets, in combination with a $1.1 million increase in
pre-tax gains from property sales during 2000. Such property sales in 2000
generated pre-tax gains of $3.9 million, compared to $2.8 million in 1999.
The Company produced FFO from real estate ownership of approximately $3.9
million for 2000, representing a modest 3% increase over 1999. FFO is defined as
income or loss from real estate operations before depreciation, gains or losses
on sales of property and provisions for impairment. This measure is not defined
by GAAP and Insignia's usage of this term may differ from other companies' usage
of the same or similar terms. Management uses this supplemental measure in the
evaluation of real estate activities and believes that it provides a measure of
cash generated by property operations.
Internet Initiatives
In aggregate, the Company invested approximately $22.5 million in Internet
and technology-related businesses during the 2000 year. These investments
included both internally developed businesses and third-party Internet-oriented
businesses with a real estate focus. Internet-based business initiatives
adversely affected income, reflecting pre-tax losses of approximately $34.7
million for the 2000 year. These losses include approximately $18.4 million in
aggregate impairment write-downs (including both internal initiatives and
third-party investments), $9.3 million of EdificeRex operating losses during the
first half of 2000 prior to de-consolidation, and $7.0 million of other internal
operating expenses. Such internal operating costs were net of a realized gain of
$811,000 from the sale of stock in Homestore.com and interest income of $464,000
earned on cash holdings of EdificeRex prior to its de-consolidation.
The Company's Internet initiatives have been a disappointment, primarily
due to adverse market conditions during the second half of 2000 that resulted in
the evaporation of equity financing for Internet technology initiatives.
Therefore, the Company has substantially ceased financing of internal and
third-party internet businesses and does not expect to invest materially in
Internet technology initiatives, other than certain Internet-related platforms
developed or invested in by Project Octane. A driving force behind this decision
was the Company's desire to eliminate all on-going exposure to the financial
requirements associated with such Internet-based initiatives.
At December 31, 2000, Insignia held remaining equity investments of
approximately $10.5 million (after approximately $8 million of impairment
write-offs) in third-party Internet-related businesses. Insignia's equity
25
ownership in these businesses ranges from 1% to 10%. While these businesses
continue to operate, their future performance is highly dependent upon the
ability to raise incremental capital to fund the on-going development of their
business plans. If they are unsuccessful in raising the necessary capital,
Insignia could incur further losses from impairment write-offs.
The Company also has a deferred credit of $3.2 million at December 31, 2000
representing losses incurred in excess of the Company's investment in EdificeRex
prior to its de-consolidation in the third quarter of 2000. EdificeRex, launched
in February 2000, represented Insignia's first internally developed
Internet-based business and the Company continues to hold an economic interest
of approximately 50% in EdificeRex. The $3.2 million excess loss is carried
as a deferred credit on the Company's balance sheet until such time as
EdificeRex achieves profitability or Insignia disposes of its interest in
EdificeRex. The Company has no obligation or intention to provide any additional
funding to EdificeRex. All other internal Internet-based operations were
terminated at December 31, 2000, resulting in a $10.4 million impairment
write-off of capitalized web-based development costs. Other than Project Octane
initiatives, the Company will look skeptically upon any future emerging
technology-related investment opportunities.
Other Items Affecting Net Income
Administrative expenses rose 38% from $11.8 million in 1999 to
approximately $16.4 million in 2000. These increases reflect increased executive
compensation in connection with a new employment agreement with the Chairman and
robust performance meeting maximum incentive targets for the 2000 year.
Interest and other income increased from $5.2 million in 1999 to $8.5
million in 2000 (including $464,000 of interest income of EdificeRex during the
first half of the 2000 year). The increase is attributed to materially higher
average cash holdings during the 2000 year, in combination with gains of
approximately $862,000 on forward contracts to purchase British Pounds
(Sterling). In addition, the Company realized foreign currency gains of
approximately $1.4 million in 2000, principally from facility borrowings in
declining European currencies. In comparison, foreign currency gains totaled
$827,000 for the 1999 year.
Interest expense increased 59%, or $4.9 million, to approximately $13.1
million for 2000, compared to 1999. This increase is due principally to
increases in prevailing interest rates throughout 2000, interest charges on 1999
credit facility borrowings of approximately $110 million to finance the
acquisitions of Lynch Murphy, St. Quintin and Douglas Elliman and further
borrowings of $15 million in 2000 to finance Internet initiatives.
Depreciation and amortization of intangibles from real estate service
operations (excluding property operations and Internet-based businesses)
increased 26%, in the aggregate, from $30.5 million in 1999 to $38.3 million in
2000. This increase is the result of substantial capital investments in property
and equipment (see also "Liquidity and Capital Resources") and the full year
impact of purchased intangible amortization for the 1999 acquisitions of St.
Quintin and Douglas Elliman.
The comparative results for the 1999 year were adversely affected by the
$4.3 million ($3.1 million net of tax benefit) non-recurring charge for merger
related expenses in connection with the March 1999 acquisition of St. Quintin
and its subsequent combination with REGL. The one-time charge was substantially
composed of the costs to vacate excess office space and, to a lesser extent,
corresponding severance costs. The one time charge included provisions for rent
expense during the period from vacancy to sublease, costs of improvements
required for sublease, free rent concessions, excess rent over sublease terms
and severance. All excess office space was subleased and severance costs were
incurred prior to December 31, 1999. Also, certain excess office space was
subleased on more favorable terms than originally estimated, resulting in a $1.3
million pre-tax income credit in the fourth quarter of 1999.
Income taxes for 2000 declined 69% compared to 1999, despite higher income,
due primarily to the non-taxable nature of the previously mentioned income of
$19.1 million from life insurance proceeds.
26
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 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 pertaining
to 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.
Real Estate Services
Commercial Real Estate Services
The Company's 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. The Company's European operations, most notably Insignia Richard Ellis,
accounted for approximately 36% of the 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 reflected 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 indicated 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
27
revenues of $104.6 million and the German business contributed service revenues
of $3.7 million. These results 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.
The Company's 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 reflected the full recognition of cost savings and revenue growth
associated with the acquisition of St. Quintin and its operational merger with
REGL, which operate as Insignia Richard Ellis, and the 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.
Residential Real Estate Services
The Company's residential service operations produced an aggregate service
revenue increase of 40% from $