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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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
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Commission File Number 1-14373
INSIGNIA FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 56-2084290
(State of Incorporation) (I.R.S. Employer Identification No.)
200 PARK AVENUE, NEW YORK, NEW YORK 10166
(Address of Principal Executive Offices) (Zip Code)
(212) 984-8033
(Registrant's Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 1, 2002, there were 22,892,356 shares of common stock outstanding.
Based on the reported closing price of $10.58 per share on the New York Stock
Exchange on such date, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $200 million.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders is incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEM 1 - BUSINESS
ORGANIZATION
Insignia Financial Group, Inc. ("Insignia" or the "Company"), a Delaware
corporation headquartered in New York, New York, is an international real estate
services company with market leading operations in the United States, the United
Kingdom and France, as well as other growing operations in continental Europe,
Asia and Latin America. 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 leasing,
sales brokerage, corporate real estate consulting, property management, property
development and re-development, apartment brokerage and leasing, condominium and
cooperative apartment management, real estate oriented financial services,
equity co-investment and other services. Insignia's real estate service
businesses include the following: Insignia/ESG, Inc. (U.S. commercial real
estate services), Insignia Richard Ellis (U.K. commercial real estate services),
Insignia Bourdais (French commercial real estate services; acquired in December
2001), Insignia Douglas Elliman (apartment brokerage and leasing) and Insignia
Residential Group, Inc. (condominium and cooperative apartment management).
Insignia also offers commercial real estate services in other key markets
throughout continental Europe, Asia and Latin America in the following
locations: Madrid, Spain; Frankfurt, Germany; Milan, Italy; Brussels, Belgium;
Dublin, Ireland; Belfast, Northern Ireland; Amsterdam, the Netherlands; Tokyo,
Japan; Hong Kong, Beijing and Shanghai, China; Bangkok, Thailand; Mumbai,
Hyderabad, Chennai and New Delhi, India; Manila, Philippines; and Mexico City,
Mexico.
In addition to traditional real estate services, Insignia deploys its own
capital, together with the capital of third party investors, in principal real
estate oriented ventures, including co-investment in existing property assets,
real estate development and managed private investment funds. In addition to
venture related investment returns, Insignia generates revenues from fee-based
services provided to these minority owned real estate investment entities.
With the December 2001 acquisition of Insignia Bourdais in France, Insignia
now enjoys an unrivaled position in the New York-London-Paris axis. These cities
represent key centers for international investing and global corporate
headquarters. In addition, Insignia enjoys a unique position in New York, where
it is the preeminent service provider of real estate services in New York City
through market leading positions of Insignia/ESG in commercial real estate
services and Insignia Douglas Elliman and Insignia Residential Group in
residential real estate services. The Company's real estate services operations
and real estate principal 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 in the United Kingdom,
Insignia Bourdais in France and other subsidiaries in continental Europe, Asia
and Latin America. Insignia Bourdais, headquartered in Paris, France, is the new
name of the recently acquired Groupe Bourdais and is a leading real estate
service provider in France. The Company's commercial services operations
generated aggregate service revenues of $618.5 million in 2001, representing 84%
of the Company's total service revenues for the year. The 2001 results do not
include any contribution from Insignia Bourdais, which commenced operations as a
part of the Insignia group beginning in January 2002. For the 2001 calendar
year, Groupe Bourdais generated revenues and pre-tax earnings of approximately
$39 million and $5 million, respectively.
United States
The Company's U.S. commercial real estate services operations commenced in
1991. 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. All commercial real estate services in the U.S.
are rendered under the Insignia/ESG brand. Through Insignia/ESG, the Company is
among the leading providers of commercial real estate services in the U.S. with
a leadership position in the New York metropolitan marketplace and a significant
presence 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 late 1990's was fueled largely by acquisitions of
regional commercial real estate service companies. Domestic growth over the past
two years has been achieved predominately through the organic expansion of
Insignia/ESG's client base. In 2001, Insignia
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acquired Baker Commercial Realty Inc., a leading service provider in the Dallas
marketplace. The Baker Commercial Realty operations have been combined with the
existing Insignia/ESG local operations - augmented by recruitment of superior
new talent in tenant representation and property services - to significantly
fortify the Company's presence in the greater Dallas area.
Insignia's U.S. commercial real estate services operation represents the
Company's largest business unit, accounting for approximately 68% of the
Company's total service revenues for the 2001 year. U.S. commercial service
operations generated service revenues of approximately $498.1 million in 2001,
relatively unchanged from $500.2 million in 2000 - an exceptionally strong year
- - and up from $389.2 million in 1999.
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
corporate real estate consulting services. The Company serves tenants, owners
and investors in office, industrial, retail, hospitality and mixed-use
properties. During 2001, the Company completed U.S. sales and leasing
transactions valued at approximately $33 billion, including more than $4.3
billion of commercial property sales and financing transactions. Insignia/ESG's
major corporate clients include JP Morgan Chase, Lehman Brothers, The New York
Times Company, Marsh & McLennan, Empire Blue Cross Blue Shield, Deutsche Bank,
Metropolitan Life Insurance, and Credit Suisse First Boston. The Company
provides services for approximately 235 million square feet of commercial real
estate including 161 million square feet of office properties, 55 million square
feet of industrial properties, 15 million square feet of retail properties and 4
million square feet of mixed-use properties. The Company's 20 largest
institutional clients account for approximately 40% of its national property
services revenues. These clients include The Irvine Company, Metropolitan Life
Insurance Co., Teachers Insurance and Annuity Association, JP Morgan Chase, and
UBS Brinson.
During 2001, Insignia/ESG sustained its market-leading position in New York
City with responsibility for 22 of Manhattan's 50 largest office-leasing
transactions, including the top two, according to a list published in the
February 2002 issue of Crain's New York Business. This represents the fifth
consecutive year that Insignia/ESG held the number one position in this survey.
The Company prides itself on the consistent, high-quality delivery of its
services across geographic markets, property types and disciplines. The Company
is active to varying degrees in 56 U.S. markets, including markets in which it
has affiliate relationships with local service providers. Affiliate
relationships are established in secondary markets where Insignia wants to offer
services for its multi-market clients without owning the local operations. The
Company currently has affiliations in the Richmond, Baltimore, Pittsburgh and
Seattle markets. In addition, specialized divisions within the U.S. commercial
services business include Capital Advisors (investment sales and financing
activities), Hotel Partners (hotel/hospitality brokerage services), Multi
Housing Properties (sales and financing of multifamily properties) and the
Development Group (fee-based development and redevelopment services).
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 the late 1990s, the Company has
expanded its U.S. commercial real estate services organization significantly
through acquisitions in Chicago, Philadelphia, Boston, Washington, DC, and
Dallas and has expanded its service capabilities in Los Angeles, San Francisco,
Atlanta and Miami through office openings and broker hiring initiatives.
United Kingdom and Continental Europe
The Company's European businesses consist of commercial real estate
operations in the United Kingdom, France, Germany, Italy, Belgium, Spain,
Ireland and the Netherlands. European operations, which accounted for 16% of
Insignia's total service revenues in 2001, produced approximately $116.4 million
in service revenues for the 2001 year. The European operations concluded sales
and lease transactions valued in excess of $14.3 billion during 2001. For the
2000 and 1999 years, Insignia's European operations generated service revenues
of $141.8 million and $108.6 million, respectively. For 2001, the British pound
continued to represent the sole foreign currency of a material business
operation, as more than 90% of Insignia's foreign operations were derived in the
U.K. in 2001 and 2000. The continental European businesses contributed positive
results for 2001 with more than $10.5 million of service revenues, representing
10% growth over 2000.
The Company's European operations were enhanced materially with the
December 2001 acquisition of Groupe Bourdais, one of France's premier real
estate service companies. Groupe Bourdais adopted the name Insignia Bourdais
from the date of closing.
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Insignia Bourdais has five offices in the greater Paris region. The Company also
maintains offices in the Aix-en-Provence, Lyon and Marseille markets and has
affiliate relationships in 20 additional markets throughout France. Insignia
Bourdais's major clients include AOL Time Warner, Siemens, GE Capital, France
Telecom, Unibail, Renault and Groupe AMA. For the calendar year 2001, the French
business completed sales and leasing transactions valued in excess of $685
million. The addition of Bourdais to the Insignia family provides the Company
with an unparalleled leadership position in three of the world's foremost
international business capitals - New York, London and Paris - and is expected
to lead to increased cross-market business activity among continental Europe,
the United Kingdom and the United States. The Company's unique competitive
position in the U.K., France and the U.S. is central to its global strategy.
Almost half of the Fortune global 500 companies are headquartered in these three
countries, and the U.K. and France account for 40% of all direct foreign
investment capital flowing into the U.S.
The Company's U.K. subsidiary, Insignia Richard Ellis, is among the three
largest commercial real estate service providers in the United Kingdom. Through
Insignia Richard Ellis, 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 the Republic
of Ireland and Northern Ireland. The Company's U.K. operation provides
broad-ranging real estate services, including agency leasing, tenant
representation, investment sales and financing, consulting, project management,
appraisal, zoning and other general property services. The major income
components are agency leasing, tenant representation, investment sales and
financing and valuation consulting.
Insignia Richard Ellis directs the Company's European expansion. The U.K.
operation spearheaded the acquisition of Groupe Bourdais as well as the
establishment of service operations in Frankfurt, Germany, Milan, Italy,
Brussels, Belgium, Madrid, Spain and Amsterdam, the Netherlands since 1998.
Asia and Latin America
The Company commenced operations in Asia in late 2000 with the
establishment of an office in Tokyo, Japan and the acquisition of Brooke
International, a Hong Kong based commercial real estate services company
(founded in 1988). Insignia augmented its Asian reach in April 2001 with the
acquisition of Brooke International's affiliated operations in India. The Brooke
businesses now operate under the Insignia Brooke name and collectively employ
approximately 190 real estate professionals and support personnel in eleven
offices in Hong Kong, China, Thailand, the Philippines and India.
The Company extended its service capability into Latin America with the
March 2001 acquisition of Grupo Inmobiliario Inova ("Inova"). Inova,
headquartered in Mexico City and founded in 1992, is a commercial real estate
service company that provides acquisition advisory and due diligence services,
project coordination and supervision, real estate valuations, tenant
representation, asset management and strategic advisory services. Inova now
operates as Insignia/ESG de Mexico and conducts business throughout the major
markets in Mexico and other leading business centers of South America, including
Buenos Aires, Rio de Janeiro and Sao Paulo.
Insignia Brooke along with the Japan operation and Insignia/ESG de Mexico
represent the Company's strategic platforms of choice from which to serve
existing clients in Asia and Latin America. They are expected to create
increasing international cross-selling opportunities with the U.S., the U.K. and
other European operations. The Asian and Latin American businesses remained in
the start-up mode during 2001, incurring operating losses of an aggregate $3.9
million for the year. Insignia expects further losses in Asia and Latin America
in the first half of 2002, but expects to break even for the full 2002 year as
these operations begin to mature and benefit from their access to the Company's
global network of clients.
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
Corporate Real Estate 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
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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
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
Multi Housing Services - sale and/or financing of income-producing
multi-family housing assets
Property Development and Redevelopment -- fee-based 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
Activity in most of the Company's U.S. markets was hampered in 2001 by the
national recession, punctuated by the terrorist attacks of September 11th. These
two events caused companies to become more hesitant about real estate plans,
delaying or canceling new space commitments, and in many instances, putting
surplus space on the market for sublease. The exception to the nationwide
pullback was New York City, which saw a sudden surge of fourth quarter leasing
activity precipitated by loss of the World Trade Center complex. Companies
dislocated from the World Trade Center area scrambled to find replacement space
on a temporary and permanent basis.
Europe
Activity also slowed markedly in the United Kingdom and Europe, as the U.S.
recession spread globally. The same forces that affected U.S. markets -
decreased corporate expansion, reduced flows of investment capital into real
property and general hesitancy in an uncertain environment - became increasingly
evident in Europe during the second half of 2001. This was exacerbated by the
events of September 11th with global corporations deferring real estate
decisions.
The consensus forecast for the U.K. economy projects continued slowdown of
overall growth in the commercial real estate sector in 2002. Economic
assumptions are that the U.K. will avoid an outright recession and GDP growth
will be 1% or better, due mainly to sustained retail spending and increased
public expenditure. Tenant representation is expected to decline in 2002 due to
increased supply, weaker demand and longer transaction periods. Investment
market activity is projected to be weaker overall for 2002, although the
favorable interest rate/yield gap may provide some upside in this part of the
market. Consulting services, which accounts for over one-third of the Company's
U.K. business, remain robust.
In France, the real estate market for 2001 showed a marked decrease in
activity levels; however, there are encouraging signs that 2002 will be more
robust than 2001, though not up to the extraordinary levels of 2000. The
demand/supply equation for office space is relatively stable, although rental
levels remain soft. The French investment market remains a key target for
international investors and this sector of the market is expected to be strong
in 2002. In Germany, space released by companies from the banking and technology
sectors is causing increases in office vacancy rates and corresponding declines
in rental rates. Yields for office buildings are low compared to the rest of
Europe; however, investment activities, mainly from local German investors, is
continuing in the major cities.
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Holland is anticipating no change in office rents during 2002 compared to
2001 levels. This is due to the downturn of demand in the technology sector and
economic expectations generally. Vacancy levels in the major markets are
increasing fast. In 2000, vacancy levels stood at 1% to 1.5%, whereas they now
stand at the 9% mark, and may increase further.
After rapid growth in 2000 and the first half of 2001, the Italian office
market stabilized following the events of September 11th and the general slowing
of the world economy. The investment market remains strong with interest coming
from international investors, particularly Germany, the U.S. and the U.K.
In Spain, the weak and worsening office leasing market is expected to
result in low levels of transactional activity in 2002. Generally, the retail
and industrial markets are more robust than the office market, largely
attributable to their early stage of evolution in the Spain.
In Belgium, the Company began 2002 with considerable project work in
backlog. Activity in the investment market is expected to be strong in 2002,
remaining relatively constant with 2001 levels. The leasing market in 2002 is
expected to be difficult due to a lack of demand, which is expected to adversely
affect transactional activity by 10% to 15%.
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 to enhance and expand the
platform
o market leadership in three of the world's most important financial
centers -- New York, London and Paris
o ability to attract, retain, support and promote the highest quality,
most skilled personnel in the industry
o resources and expertise to deploy the Company's capital to create
transactional and property services opportunities.
United States
Competition is intense in the U.S. commercial property services industry,
particularly in the areas of tenant representation, agency leasing and property
management. 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 Jones Lang LaSalle, Trammel Crow, CB Richard
Ellis, Cushman & Wakefield and Grubb & Ellis.
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.
The Company, as tenant representative, has arranged major transactions over the
past three years for such well-known entities as the following: JP Morgan Chase,
Lehman Brothers, Credit Suisse First Boston,
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Barclay's, Marsh & McLennan, Metropolitan Life Insurance, Deutsche Bank, The New
York Times Company, Empire Blue Cross Blue Shield, Waterhouse Securities,
Citigroup, Sidley Austin Brown & Wood and Martha Stewart Enterprises.
As previously noted, the Company participated in the top two office-leasing
transactions and 22 of Manhattan's 50 largest office-leasing transactions for
the 2001 year, according to a list published in the February 2002 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 five of the past six years,
including in 2001 (awarded for the Company's representation of Arthur Andersen
and Boston Properties in connection with a new corporate headquarters
development). The Company believes that its outstanding track record provides a
distinct competitive advantage.
Competition for third-party commercial property services is based
principally on the 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 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, JP Morgan Chase, Metropolitan Insurance
Company, Teachers Insurance and Annuity Association and UBS-Brinson.
United Kingdom and Continental Europe
Competition is also intense among commercial service providers in Europe.
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. In 2001, the Company retained the number one position in
the highly competitive central London market for leasing and acquisition
services according to a survey published in the March 9, 2002 issue of Estates
Gazette. The Company believes that its U.K. subsidiary's operations and
reputation place Insignia at a strategic advantage over other primary
competitors including CB Hillier Parker, Knight Frank, Cushman & Wakefield and
FPD Savills. In France, the real estate marketplace is dominated by Vendome Rome
Auguste Thouard and Insignia Bourdais. Based on a survey published by
L'Immobiliere d'enterprise Magazine, these two firms collectively control
approximately 60% of leasing and investment activity in France, with Insignia
Bourdais maintaining almost a 20% share. DTZ Jean Thouard, Soprec and Keops are
other key players in France, but each maintains considerably less market share.
Residential Real Estate Services
The Company's residential real estate services are focused on the New York
City marketplace through the operations of Insignia Douglas Elliman and Insignia
Residential Group. Through these businesses, the Company provides apartment
brokerage and leasing and condominium and cooperative apartment management. The
Company's residential services operations generated aggregate service revenues
of $119.2 million in 2001, or approximately 16% of the Company's total service
revenues.
New York City Apartment Sales and Rentals
Insignia Douglas Elliman, founded in 1911 and acquired by Insignia in June
1999, provides sales and rental services in the New York City residential
cooperative, condominium and rental apartment market. Through Insignia Douglas
Elliman, the Company commands the number two position in this market, according
to the March 11, 2002 issue of Crain's New York Business, with gross sales
volume of approximately $2.4 billion in 2001. Insignia Douglas Elliman also
operates in upscale suburban markets in Long Island (Manhasset, Locust Valley
and Port Washington/Sands Point). Insignia Douglas Elliman has approximately 850
brokers, supported by approximately 120 corporate employees in 12 offices in the
New York City area. In 2001, Insignia Douglas Elliman generated service revenues
of approximately $92.9 million, or 13% of the Company's total service revenues
for the year.
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New York City Apartment Management
Insignia Residential Group is the largest manager of cooperative,
condominium and rental apartments in the New York metropolitan area, according
to a survey in the February 2002 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 employs more
than 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 Worldwide Plaza, Fresh Meadows and Horizon House.
In 2001, Insignia was engaged to manage Stuyvesant Town/Peter Cooper Village, an
11,000-unit residential community owned by Metropolitan Life - one of the single
largest property services assignments ever awarded in New York City. Manhattan
is the largest market for Insignia Residential Group, although it also maintains
a presence in three other 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 $26.3 million in 2001.
Services
The residential services provided by the Company include the following:
Residential Apartment 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
Property Management -- accounting services on a cash or accrual basis, lease
administration, central purchasing, cash management, insurance oversight,
collections and compliance monitoring and construction management
Mortgage Brokerage Services -- mortgage brokerage services including resale
and financing arrangements for customers through third-party financial
institutions
Market Trends
The New York City co-op and condo market soared throughout the late 1990's
and into 2000, fueled by a robust economy and exceptional performance of the
nation's financial markets. The average sale price for a New York City apartment
grew from $531,000 in the first quarter of 1999 to $787,000 at year-end 2000.
The gross value of apartments sold reached a peak of $7.2 billion in 2000. Sales
of New York co-op and condo apartments began to slow in 2001 from the record
pace of 2000. Sales activity had been trending lower for most of 2001, mirroring
the weakening economy and contraction of the financial services sector. These
trends were magnified in the immediate aftermath of September 11th. New contract
signings declined significantly as apartment buyers put purchases on hold. Over
the course of the fourth quarter of 2001, the moderate-priced market segment
(units valued at less than $1 million) began to recover as buyer confidence was
slowly restored. Subsequently, the recovery began spreading to higher priced
market segments, but the high-end of the market - apartments listing for $5
million or more - had yet to show any appreciable recovery at year-end, as
buyers continued to put off lifestyle driven purchases.
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 New York City residential market
o superior service capabilities
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o inherent synergies between co-op/condo sales and rental activities and
management of residential properties
o developing synergies with the Company's commercial real estate services
operations
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
Apartment Sales and Rentals
Through Insignia Douglas Elliman, the Company enjoys a long-established
leadership presence in the New York City marketplace with a well-recognized
brand name and strong market share. Insignia Douglas Elliman's primary
competitors in New York City include, most notably, Terra Holdings, The Corcoran
Group, Inc. and Sotheby's International Realty. In 2001, Insignia Douglas
Elliman achieved the number two ranking in New York City, according to a survey
published in the March 11, 2002 issue of Crain's New York Business, based on
total sales volume of approximately $2.4 billion. This ranking represents a fall
from the number one position in 2000 and results solely from the combination of
three competitors - the former Brown Harris Stevens, Halstead/Feathered Nest and
Halstead Property Co. - under the ownership of Terra Holdings. Insignia Douglas
Elliman's brand name, geographic reach in the New York marketplace and its
alignment alongside the Company's other market leading New York operations of
Insignia/ESG and Insignia Residential Group represent clear advantages over most
competitors in the New York marketplace.
Apartment Management
Insignia Residential Group operates the largest cooperative and condominium
management business in the New York metropolitan area. The cooperative,
condominium and apartment management business is extremely competitive, with
price and service-quality being the primary determinants of success. 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 on price. Further, some owner associations have opted for
self-management, which eliminates the need for third-party service providers.
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 its size volume.
REAL ESTATE PRINCIPAL INVESTMENT ACTIVITIES
Co-investment and Development
Through Insignia Financial Services, the Company pursues opportunities to
invest in operating real estate assets. The Company identifies investment
opportunities for various clients and invests alongside of those clients or, in
limited instances, by itself in the purchase of qualifying properties. The
Company's co-investment partners include the following notable business
entities: Citigroup, ING Barings, Blackacre Capital Management, The Witkoff
Group, Lennar, Praedium, Lone Star Opportunity Fund, Prudential, GE Investments
and Whitehall Street Real Estate. As of December 31, 2001, Insignia had invested
capital of $29.3 million in 37 minority owned property assets. These properties
own over 9.5 million square feet of commercial property, 950 multi-family
apartment units and 875 hotel rooms. The Company's minority ownership interests
in co-investment property range from 1% to 30%. The gross aggregate asset
carrying value of these properties totaled more than $1 billion at December 31,
2001.
As of December 31, 2001, wholly-owned subsidiaries of the Company owned
three commercial properties. The carrying amount of these properties totaled
$41.8 million and real estate mortgage notes encumbering the properties totaled
$37.3 million. These properties, which are consolidated in the Company's
financial statements, include the following: (i) Brookhaven Village, a 155,000
square foot retail facility located in Norman, Oklahoma; (ii) Dolphin Village, a
136,000 square foot retail facility located in St. Petersburg, Florida; and
(iii) Shinsen Place, an office building located in Tokyo, Japan that was
acquired for, and is currently under contract to be sold to, a client in late
March 2002. Insignia has invested capital of $5.5 million in these three
properties and has no further obligations to the subsidiaries or their
creditors.
In addition, Insignia has an ownership interest in, and directs the
development of, four office developments. The Company also owns a parcel of
land, located adjacent to one of the developments, that is held for future
development. The Company's total
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investment at December 31, 2001 in development assets was approximately $13.1
million. The four development properties have investment partners, with
Insignia's ownership in each ranging from 25% to 33%. Insignia has not initiated
any new development activities since mid-2000. The Company's obligations with
respect to development assets, beyond its investment, is limited to $8.9 million
in partial guarantees of construction financing.
Private Investment Funds
Insignia Opportunity Trust
Insignia Opportunity Trust ("IOT") is an Insignia-sponsored private real
estate investment fund formed in late 1999. IOT, through its subsidiary
operating partnership, Insignia Opportunity Partners ("IOP"), 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
equity 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. All
capital commitments to IOT and IOP have been called and funded. Insignia has an
aggregate ownership interest of approximately 13% in IOT and IOP. Insignia
realized total earnings from IOT and IOP of approximately $2.8 million and
$847,000 during 2001 and 2000, respectively.
Insignia Opportunity Partners II
In September 2001, Insignia closed the capital-raising phase for a second
real estate investment fund, Insignia Opportunity Partners II ("IOP II"), with
$50 million of equity capital commitments from Insignia and third-party
investors. IOP II intends to invest primarily in secured real estate debt
instruments, similar to the investment initiatives of IOT. Insignia holds a 10%
ownership in IOP II and serves as its day-to-day advisor. The investment
activities of IOP II commenced in December 2001 and no earnings were generated
during the 2001 year.
At year-end 2001, Insignia held investments totaling $11.6 million in IOT
and IOP II and had commitments to invest an additional $4 million in IOP II. The
gross carrying value of assets owned and managed by these two funds totaled
approximately $125 million at December 31, 2001.
DISCONTINUED OPERATIONS
In late December 2001, Insignia entered into a contract to sell its Realty
One single-family home brokerage business and affiliated companies to Real
Living, Inc., effective as of December 31, 2001. Real Living, Inc. is a
privately held company formed by HER Realtors of Columbus, Ohio and Huff Realty
of Cincinnati, Ohio. The sale formally closed on January 31, 2002. The sale
price was approximately $33 million, including approximately $29 million in cash
at closing and additional payments aggregating as much as $4 million. These
payments include a $1 million reimbursement for Realty One operating losses in
January 2002; a potential earn-out of as much as $2 million payable over the
next two years (depending on the performance of the business); and a $1 million
operating lease payable over four years for the use of proprietary software
developed by Insignia for an Internet-based residential brokerage model. Realty
One's operations were discontinued for financial reporting purposes at December
31, 2001 and the results of operations for Realty One are reported separately in
the Company's financial statements for all periods presented for comparability.
The Company recognized a loss in connection with the sale of Realty One of
approximately $17.6 million (net of applicable taxes of $4 million) for the year
ended December 31, 2001. Assets and liabilities of Realty One have been
classified separately in the Company's consolidated balance sheets at December
31, 2001 and 2000. Further information on discontinued operations can be found
in Note 3 to the Company's consolidated financial statements included in Item 14
of this Form 10-K.
2002 OUTLOOK
As expected, activity levels in all segments of the Company's real estate
service business declined in 2001 from the record levels of 2000. The breadth
and depth of the global recession - punctuated by September 11 - took a sharp
toll on nearly all the markets in which Insignia operates. The exception was the
New York City office market, which received a short-term stimulus in the fourth
quarter from the scores of businesses that were forced to procure new premises
in the wake of the terrorist attack in lower Manhattan. Absent such a stimulus,
the New York commercial market would have been characterized by the same
deteriorating fundamentals - slowing leasing activity, negative absorption,
decreased rents - as the rest of the nation.
10
At the turn of 2002, U.S. commercial markets had yet to respond materially
to signs of an emerging economic recovery. Companies continue to be slow to make
occupancy decisions and excess supply continues to enter the markets in the form
of sublease space, albeit at rates markedly decreased from late 2001. When the
U.S. economy recovers, it will take time for U.S. commercial real estate markets
to rebuild momentum. That said, Insignia expects to benefit from its leadership
position in most first-tier U.S. central business districts, and should be able
to continue expanding its market share in a recovering economy.
In Europe, GNP growth forecasts of approximately 1% in the U.K. and 0.8% in
France will present a challenging environment in 2002. However, any reduction in
U.K. leasing activity can be expected to be offset by increased consulting
assignments and a continuing favorable environment for investment activity. The
interest rate/yield gap can be expected to generate continued investor interest
in leveraged transactions. However, tightening credit standards will make
acquisitions more difficult to close. The French investment market continues to
attract a great deal of foreign capital, a trend that is expected to continue in
2002.
Roughly 16% of the drop in the Company's Net EBITDA (defined as income before
depreciation, amortization, income taxes and non-recurring charges) from 2000 to
2001 was attributable to losses associated with the Company's emerging Asian and
Latin American platform. The Company expects these operations to continue
incurring losses during the first half of 2002 as Insignia invests in
stabilizing these platforms. The Company expects these operations to achieve
break-even status for the 2002 year.
The Insignia Douglas Elliman operations accounted for approximately 28% in
the year-to-year decrease in the Company's Net EBITDA. This business underwent a
management, marketing and branding re-positioning in 2001, which is expected to
improve market share and lower costs. To some extent, Insignia Douglas Elliman's
performance will track the overall prosperity of the New York City residential
real estate market. In early 2002, the market has shown signs of recovering from
the lackluster period exacerbated by September 11th. New contract signings
jumped 80% in January 2002 from December 2001. The continued strength of the New
York residential market will be dependent on an economic recovery, stability in
U.S. capital markets and the absence of new terrorist incidents.
In the current environment, the Company has gone to great lengths to wring
discretionary expenses out of its cost structure and to defer non-essential
capital spending. As a result, the Company believes that it has aligned its cost
structure with the reduced level of business activity. However, contingency
expense reductions have been identified in the event that global real estate
markets deteriorate further in 2002. At the same time, Insignia is highly
conscious of maintaining and enhancing its essential platform - including, most
significantly, the human capital - that drives its business.
ACQUISITIONS
Over the past decade, Insignia has continually demonstrated the ability to
recognize accretive acquisition opportunities and to successfully integrate them
within the Company's 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 comprised of experienced
professionals in both the U.S. and the U.K. Insignia acquired the following
commercial real estate services businesses during 2001:
Groupe Bourdais
In late December 2001, Insignia completed the acquisition of Groupe
Bourdais, one of France's premier commercial real estate services companies.
Founded in 1954, Paris-based Bourdais has a total staff of 350 and operates
eight offices, including five in the Ile de France region (Greater Paris) and
regional offices in Lyon, Aix-en-Provence and Marseille. Bourdais also has
strategic affiliations and franchise agreements with local companies in 20
markets throughout France. The purchase price consists of total potential
consideration of approximately $49 million, including an initial payment of
approximately $21.4 million in cash and stock and additional payments totaling
up to approximately $28 million over the three years ending December 31, 2004,
depending on the performance of the Bourdais operation. Groupe Bourdais now
operates under the Insignia Bourdais name.
Baker Commercial
In October 2001, Insignia acquired Baker Commercial Realty, Inc. ("Baker"),
a leading provider of commercial real estate services in the greater Dallas
area. Baker provides tenant representation, land and investment property sales
and strategic real estate planning. The Baker acquisition will augment
Insignia's existing regional tenant representation and investment sales
capabilities in the greater Dallas area. The base purchase price was
approximately $2.2 million and was paid in cash at closing. Additional purchase
consideration of up to $1.5 million, payable over three years, is contingent on
the future performance of the Dallas operations.
11
Brooke International - India
In April 2001, Insignia further expanded its Asian presence through the
acquisition of Brooke International's operation in India. The purchase price for
the Indian operation was approximately $700,000, all of which was paid in cash
at closing. The India purchase followed the December 2000 acquisition of Hong
Kong based Brooke International and its offices in China and Thailand. Brooke
International is a commercial real estate company specializing in corporate and
investment services.
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 Latin America. The purchase
price was approximately $550,000 and was paid in cash.
CREDIT AGREEMENT
In May 2001, Insignia entered into a new, three-year $230 million revolving
credit facility, representing a $45 million increase over the prior $185 million
facility. The revolving credit facility was arranged by First Union Securities,
Lehman Brothers and Bank of America and involves a syndicate of ten national and
international financial institutions. The credit facility is used for working
capital and acquisition needs. At December 31, 2001, Insignia had borrowings of
$149 million on the facility and outstanding letters of credit of $12.3 million.
The Company paid down $32 million of revolving credit facility debt in January
2002 and at March 20, 2002 had maximum remaining availability of more than $100
million.
INDUSTRY SEGMENT DATA
Insignia's operating activities for 2001 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 and re-development,
consulting and other services. The commercial segment also includes the
Company's principal real estate investment activities. Insignia's commercial
segment in 2001 comprises the operations of Insignia/ESG in the U.S., Insignia
Richard Ellis in the U.K. and other businesses in continental Europe, Asia and
Latin America. Insignia Bourdais, in France, commenced operations in January
2002. The residential segment provides services including apartment brokerage
and leasing, rental brokerage, property management and mortgage brokerage
services and consists of the New York based operations of Insignia Douglas
Elliman and Insignia Residential Group. Insignia's Internet initiatives, which
were launched in late 1999, have been terminated. The operating impact for 2001
is limited to $13.4 million of write-downs on equity Internet investments made
during late 1999, 2000 and early 2001 and $3.2 million of income resulting from
the liquidation of EdificeRex. The EdificeRex income represents the recognition
of losses in excess of investment incurred during the first half of 2000, prior
to de-consolidation of this once proprietary web-based business. Such excess
losses had been carried on the Company's balance sheet as a deferred credit
since de-consolidation in the third quarter of 2000. The Company terminated its
internally developed Internet initiatives 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 consolidated financial statements of the Company 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.
CHANGES IN ACCOUNTING PRINCIPLES
Revenue Recognition
At December 31, 2000, the Company changed its method of accounting for
revenue recognition for leasing commissions in compliance with Staff Accounting
Bulletin 101 ("SAB 101"), Revenue Recognition in Financial Statements, effective
as of January 1, 2000. Prior to the accounting change, 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,
12
2000, the Company's leasing commissions that are payable upon certain events
such as tenant occupancy or payment of rent are recognized upon the occurrence
of such events.
Operating results for the years ended December 31, 2001 and 2000 are
presented in compliance with the requirements of this accounting change. The
cumulative effect of the accounting change on prior years resulted in a
reduction to income of $30.4 million (net of applicable taxes of $23.3 million),
which is included in net earnings for the year ended December 31, 2000. The
Company recognized revenue of $18.8 million and $80.4 million (before associated
commission expenses) during 2001 and 2000, respectively, that was included in
the cumulative effect adjustment at January 1, 2000. 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.
Business Combinations and Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and other intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue to be
amortized over their estimated useful lives.
The Company has adopted SFAS No. 141 for all business combinations
completed after July 1, 2001 and will fully implement SFAS No. 141 and SFAS No.
142 beginning in the first quarter of 2002. Amortization of goodwill that would
become non-amortizable under SFAS No. 142 totaled approximately $17.3 million
for the 2001 year. Elimination of this amortization would have improved income
by approximately $10 million (net of applicable taxes) and diluted earnings per
share by approximately $0.43 for 2001. The Company's initial impairment tests on
goodwill and other indefinite-lived intangible assets will be completed, with
any measured impairment recorded through earnings as a cumulative effect of a
change in accounting principle, during the first quarter of 2002. Insignia
preliminarily estimates an aggregate impairment charge before tax effects of
between $20 million and $50 million, based on current industry multiples. The
Company is obtaining a third party valuation to support its estimates, and the
amount of the impairment charge (together with related tax benefit) will not be
determined until the end of the first quarter.
RISK FACTORS
Market Conditions
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate will adversely affect Insignia's business and
may cause, among other things:
o a decline in leasing activity;
o a decline in consumer demand for Manhattan residences;
o a declines in the availability of capital for investment in and
mortgage financing for commercial real estate; and
o a decline in rental rates and/or a decline in real estate prices, with
a commensurate decline in real estate service revenues, such as leasing
and brokerage commissions and management fees.
The real estate market tends to be cyclical and related to the condition of
the economy as a whole or, at least, to the public perception of the economic
outlook. Capital availability also tends to be cyclical, leading to periods of
excess supply or shortages. When supply is constrained or the economic outlook
is poor, leasing volumes may decline. When capital is constrained or there is
excess supply, property investment volume may decline.
Principal Investment Activities
In addition to providing real estate services, Insignia invests in real
estate assets and real estate debt. Generally, the Company's investment strategy
involves identifying investment opportunities and investing as a minority owner
in entities formed to acquire such assets. Accordingly, the Company's ability to
make those kinds of investments depends in part on the supply of third party
investment capital for commercial real estate and related assets.
As of December 31, 2001, the Company held investments totaling
approximately $29.3 million in 37 minority-owned entities that acquired existing
real estate throughout the United States and, in one instance, in London. The
Company's ownership interests in these entities ranged from 1% to 30%. In
addition to its investment, the Company is obligated to fund $455,000 in
additional
13
capital contributions and has entered into a guarantee of $5.2 million with
respect to a portion of the debt encumbering one of the assets.
As of December 31, 2001, two wholly owned subsidiaries of the Company owned
three commercial properties. The carrying amount of these assets was $41.8
million, and real estate mortgage notes totaling $37.3 million encumbered the
assets. Two of these assets are shopping centers located in the United States,
and the third is an office building in Japan that was acquired for, and is under
contract to sell to, a client. The property sale is expected to close in late
March 2002.
In addition, the Company has an ownership interest in, and directs the
development of, four office developments. The Company also owns a parcel of
land, located adjacent to one of the developments, that is held for future
development. The Company's total investment in these properties was
approximately $13.1 million at December 31, 2001 for interests ranging from 25%
to 100%. A subsidiary of the Company is obligated to complete construction of
each asset, and the Company has further outstanding $8.9 million in guarantees
of construction loans secured by letters of credit.
Each entity in which the Company holds an investment is a single purpose
entity, the assets of which are subject to the obligations only of that entity.
Each entity's debt, except to the extent of the guarantees mentioned above, is
either (i) non-recourse except to the real estate assets of the subject entity
(subject to carve-outs standard in such non-recourse financing, including the
misapplication of rents or environmental liabilities) or (ii) an obligation
solely of such limited liability entity and thus is non-recourse to other assets
of the Company.
These investments carry inherent risk, including the loss of the Company's
entire investment in any single asset. Because the disposition of a single
significant investment can impact the Company's financial performance in any
period, the Company's real estate investment activities could increase (and have
historically increased) fluctuations in the Company's net income. The Company's
acquisition of additional investments is subject to the availability of capital
to fund such investments. Because covenants in the Company's revolving credit
facility restrict the Company's ability to incur indebtedness and to raise
additional capital in many respects, the Company's investment activities may be
limited, which may impact the Company's future financial performance. An
inability to acquire additional investments will reduce the likelihood that the
Company will realize investment gains in future periods. The Company, as a
minority owner in investments it does acquire, has limited control over the
timing of the disposition of these investments and the realization of any gain.
The Company evaluates each asset on a quarterly basis for evidence of
impairment. Impairment losses are recognized whenever circumstances indicate
declines in property values below carrying amount and the related cash flows are
not believed sufficient to recover the Company's investment carrying amount.
The Company provides real estate services to and receives real estate
service fees from the entities comprising its principal investment activities.
Such fees generally include property management fees, asset management fees,
development management fees, leasing commissions, acquisition fees, sales
commissions or financing fees. With respect to fees that are currently recorded
as expense by the entities, the Company includes the fees in current income,
while its share as owner of such fee is reflected in the income or loss from the
investment entity. If the fee is capitalized by the investment entity, the
Company records only the portion of the fee attributable to third party
ownership and defers the portion attributable to its ownership. The amount of
fees received in cash by the Company during 2001 and 2000 from such real estate
entities totaled approximately $8.8 million and $14 million, respectively. Of
such fees, $684,000 and $788,000 in 2001 and 2000, respectively, were not
recognized in revenue during the periods by virtue of the Company's ownership
interest.
Private Investment Funds
The Company has sponsored the formation of two private investment funds to
make opportunistic investments in real estate related assets, primarily real
estate debt securities with an emphasis on below investment grade securitized
debt obligations backed by mortgages on commercial and multifamily real estate.
As of December 31, 2001, the Company had, through special purpose subsidiaries,
investments totaling $11.6 million in these funds and had an obligation to
invest an additional $4 million. The Company also receives certain fees in
connection with its management of the investments made by these funds. The
Company's minority ownership in these two entities ranges from 10% to 13%
(excluding promoted interests).
The investments made by the funds are subject to risks similar to those
that the Company and its co-investment activities are subject to; including
risks associated with economic downturns, interest rate fluctuations and
declining demand for real estate. In addition, the activity of identifying,
acquiring and realizing on attractive real estate investment securities and
non-securitized obligations has, from time to time, been highly competitive and
involves a high degree of uncertainty. There can be no assurance that the
Company's funds will recognize their rate of return objectives.
14
The risk with respect to these investments is increased by the use of
leverage to finance assets. While such leverage has generally been maintained at
no more that 25% of total capital, leverage available for this purpose has been
limited to repo financing. Such financing is much like margin debt, and if the
value of the asset financed declined, could result in losses from forced sales
by the lender.
Urban Concentration of Operations
The Company's operations are concentrated in the world's largest financial
centers, including New York, London and Paris. In addition to risks related to
the local real estate markets and economies of these cities, there is the risk
that unusual events, including events such as those of September 11th, in one or
more of these cities could have a material adverse effect on the Company's
business and financial performance.
Acquisitions
The Company's future success and profitability will depend, in part, on its
ability to enhance its management and operating systems, anticipate and adapt to
advances in technology, secure financing for capital expenditures and strategic
acquisitions and retain employees and customers through periods of internal
change. As discussed in Item I of this Form 10-K under the heading
"Acquisitions," the Company has in the past pursued and may in the future
continue to pursue an acquisition strategy that focuses on expansion both
domestically and internationally. This historical growth and any significant
future growth will continue to place demands on the Company's resources and
there can be no assurance that the Company will be able to acquire businesses on
favorable terms in the future. Challenges and issues commonly encountered in
strategic acquisitions include:
o diversion of management's attention to assimilating the acquired
business;
o maintaining employment relationships with the Company's employees and
employees of the acquired business;
o assimilating geographically dispersed personnel and operations;
o adverse short-term effects on results of operations;
o integrating financial and other administrative systems; and
o maintaining uniform standards, controls, procedures and policies.
If the Company is not able to manage these risks, and there can be no
assurance that it will, its business could suffer significantly. In addition,
the clients of an acquired business could determine not to do business with the
Company. Conflicts could exist or arise out of the Company's representation of
both its long-term clients and the clients of the acquired business that could
threaten the Company's relationships with both its existing clients and its new
clients. If the acquired business does not perform as well as is expected, which
could be affected by the resignation of key employees, the loss of clients or
otherwise, goodwill recorded in connection with the acquisition could be written
off, having a negative impact on the Company's earnings.
Insignia expects to finance future acquisitions and internal growth through
a combination of funds available under its revolving credit facility and cash
flow from operations. However, covenants in the revolving credit facility
restrict the Company's ability to make acquisitions and raise additional capital
in many respects. Accordingly, the Company may not be able to obtain financing
to complete acquisitions that it believes would benefit its business or
financial condition, resulting in lost business and growth opportunities.
International Operations
Insignia derived approximately 16% of its total service revenues (20% after
giving pro forma effect to the acquisition of Groupe Bourdais) from outside the
United States in the fiscal year ended December 31, 2001. The increased scope of
international operations may lead to more volatile financial results and
difficulties in managing the combined businesses because of, but not limited to,
the following:
o unexpected changes in regulatory requirements;
o the burden of complying with multiple and potentially conflicting laws
in differing jurisdictions;
o the impact of regional or country-specific business cycles and economic
instability;
o currency restrictions and exchange rate fluctuations;
o limited familiarity with local business customs and operating
environments;
o difficulties and costs of staffing and managing international
operations;
o potentially adverse tax and tariff consequences;
o the geographic, time zone, language and cultural differences between
personnel in different areas of the world; and
o war, civil disturbances and terrorist acts.
15
Insignia intends to expand its international activities and to grow the
market in which its services and products are available. If the Company were
unable to successfully implement these plans, maintain adequate long-term
strategies that successfully manage the risks associated with its global
business or adequately manage operational fluctuations, its business, results of
operations or financial condition could be materially and adversely affected.
On a pro forma basis, including the acquired Groupe Bourdais operation, for
the year ended December 31, 2001, 20% of the Company's service revenues and 37%
of EBITDA were derived from European operations conducted using the British
pound or euro currencies. All currencies other than the pound, euro and dollar
have comprised less than 1% of the Company's revenues. Because the pound and
euro have declined relative to the dollar over the three years ended December
31, 2001, the Company's reported revenues and earnings from European operations
during that period have been adversely affected when translated to dollars.
Continued changes in the value of such currencies against the dollar will affect
the Company's reported financial results in dollars.
Insignia has in the past borrowed in pounds and euros under its revolving
credit facility, and in late 2000 entered into forward exchange contracts to
purchase pounds for pound denominated payments made in March 2001. These
activities were undertaken to hedge acquisition costs in Europe. The pound and
euro declined in value against the dollar while these hedges were outstanding
and, as a result, Insignia reported profits from the positions. In the second
quarter of 2001, Insignia closed all of its hedge positions and has not hedged
its pound and euro exposures since that date.
Insignia also acquired an office building in Japan in late 2001,
simultaneously contracting to resell to a client in March 2002. Insignia
purchased yen to close the acquisition and simultaneously purchased a contract
to resell the same number of yen at a fixed dollar price in March.
Insignia is authorized to use currency hedging instruments, including
foreign currency forward contracts, purchased currency options and borrowings in
foreign currency. Economic risks associated with these hedging instruments
include: (i) unexpected fluctuations in interest rates impacting Insignia's
future buying power for purchasing foreign currencies; and (ii) unexpected
changes in the timing and collection of funds related to the hedging
instruments, both of which can cause hedging instruments to be ineffective. An
ineffective hedging instrument may expose Insignia to currency losses, which
could have an adverse effect on Insignia's business, results of operations or
financial condition. There can be no assurance that such hedging will be
effective, nor can there be any assurance that Insignia will undertake hedges to
prevent losses on its foreign currency investments.
Competition
Insignia competes across a variety of business disciplines within the real
estate services industry, including commercial agency leasing, tenant
representation, corporate property services, property and asset management,
investment sales, development, redevelopment, consulting services, real estate
oriented financial services and equity co-investment, as well as apartment
brokerage and leasing and condominium and cooperative apartment management. In
general, with respect to each of Insignia's business disciplines, it cannot
assure that it will be able to continue to compete effectively, will be able to
maintain current fee arrangements or margin levels or will not encounter
increased competition. Each of the business disciplines in which Insignia
competes is highly competitive on an international, national, regional and local
level. Depending on the industry segment, Insignia faces competition from other
real estate service providers, institutional lenders, insurance companies,
investment banking firms, investment managers and accounting firms (any of which
may be a global, national, regional or local firm). The consolidation trend has
spawned a number of larger international and national competitors that are
integrated across property types and disciplines, however many of Insignia's
competitors are local or regional firms, which are substantially smaller in
size, but which may be larger than Insignia in a specific local or regional
market.
The advent of the Internet has introduced new ways of providing real estate
services, as well as new competitors to the industry. Insignia cannot currently
predict which competitors will remain in the industry nor can it predict what
its response to them will be. This response could require significant capital
resources, changes in Insignia's organization or technological changes. If
Insignia is not successful in developing and implementing a strategy to address
the risks and to capture the related opportunities presented by technological
changes on the emergence of e-business, its business, results of operations or
financial condition could be materially adversely affected.
The Company has faced increased competition in recent years. In addition,
in recent years, there has been a significant increase in real estate ownership
by REITs that self-manage their real estate assets. Continuation of this trend
could shrink the number of properties available to be managed by third party
service providers, decrease the demand for the Company's services and thereby
significantly increase its competition. In general, the Company expects the
industry to become increasingly competitive in
16
the future. There can be no assurance that such competition will not have a
material adverse effect on the Company's business, results of operations or
financial condition.
Government Regulation
The Company and its brokers, salespersons and, in some instances, property
managers are regulated by the jurisdictions in which they do business. These
regulations include licensing procedures, prescribed fiduciary responsibilities
and anti-fraud prohibitions. For example, the Company's brokerage of real estate
sales and leasing transactions requires the Company to maintain brokerage
licenses in each jurisdiction in which it operates. If the Company fails to
maintain its licenses or conducts brokerage activities without a license, it may
be required to pay fines or return commissions received or have its license
suspended. The Company's activities are also subject to various local, state,
national and international jurisdictions, fair advertising, trade, housing and
real estate settlement laws and regulations and are affected by laws and
regulations relating to real estate and real estate finance and development. In
particular, a number of jurisdictions have imposed environmental controls,
permitting requirements and zoning restrictions on the development of real
estate.
The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. The Company believes that it has the necessary permits and
approvals to operate each of its properties and their respective businesses.
Under the Americans with Disabilities Act of 1990 ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the
properties in which it holds an equity interest are substantially in compliance
with these requirements, a determination that such properties are not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants.
Brokerage Activities
In addition to the governmental regulations discussed above, as a licensed
real estate broker, Insignia and its licensed employees are subject to statutory
due diligence, disclosure and standard-of-care obligations in connection with
brokerage transactions. Failure to fulfill these obligations could subject
Insignia or its employees to litigation from parties who purchased, sold or
leased properties Insignia or its employees brokered. Insignia may become
subject to claims by participants in real estate sales claiming that Insignia
did not fulfill its statutory obligations as a broker.
Project leasing revenues are derived from the steady turnover of tenants,
which provides the Company with an opportunity to earn a commission paid by the
owner of the property for renewing the existing tenant's lease or releasing the
space to a new tenant. In an economic downturn, occupancy rates can be affected
and there can be no assurance that existing tenants will renew or that new
tenants will be in the real estate market.
The residential brokerage industry is subject to 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.
Property Management
Many of Insignia's property management clients are long-term clients that
use the Company's services for new projects as well as existing assignments. If
Insignia fails to maintain its existing client relationships or fails to develop
and maintain new client relationships, it could experience a material adverse
effect on its business, results of operations or financial condition. Consistent
with general practice in the real estate industry, many of these agreements are
cancelable by the client for any reason on as little as 30 to 60 days' notice.
The Company has been successful in retaining and renewing a significant portion
of its contracts, but may not be able to do so in the future. Moreover,
increased competition may force the Company to renew such contracts on less
favorable terms. The failure to secure renewals of existing contracts or the
necessity of entering into new contracts on less favorable terms could
negatively impact the Company's business, results of operations or financial
condition.
17
Insignia's revenue from property management services is generally based
upon percentages of the revenue generated by the properties that it manages.
Therefore, Insignia's revenue would be adversely affected by decreases in the
performance of the properties it manages. Property performance typically depends
upon the following factors, many of which are partially or completely outside of
Insignia's control:
o the ability to attract and retain creditworthy tenants;
o the magnitude of defaults by tenants under their respective leases;
o governmental regulations, local rent control or stabilization
ordinances that are or may be put into effect;
o the ability to manage operating expenses;
o various uninsurable risks;
o the nature and extent of competitive properties;
o financial and economic conditions generally and in the specific areas
where properties are located; and
o the real estate market generally.
In addition, in its property management business, Insignia supervises third
party contractors providing construction and engineering services for these
properties. While its role is limited to that of a supervisor, Insignia may be
subjected to claims for construction defects or other similar actions. Adverse
outcomes of property management litigation could negatively impact Insignia's
business, financial condition or results of operations.
Seasonality
Insignia's operating income and earnings have historically been lower
during the first three calendar quarters than in the fourth quarter. The reasons
for the concentration of income and earnings in the fourth quarter include a
general, industry-wide focus on completing transactions by calendar year end, as
well as the constant nature of the Company's non-variable expenses throughout
the year versus the seasonality of its revenues. Based on its operating history,
the Company generally expects a pattern of higher revenues and income in the
last half of the year and a gradual slowdown in transactional activity and
corresponding operating results during the first quarter. Neither the 2001 nor
2000 years have followed this typical seasonal pattern. As evidence, the second
quarter of 2000 was abnormally robust and even surpassed the good third quarter
of that year. In 2001, the Company realized its best ever first quarter, yet
produced much lower second and third quarters than the preceding year due to the
effects of the global economic slowdown and the tragic events of September 11th.
As a result, quarter-to-quarter comparisons may be difficult to interpret. In
addition, market disruptions like that of the third quarter of 2001 can alter or
increase the effect of "normal" seasonality. Finally, revenue recognition on
lease commissions was changed as required by SAB 101, and the Company does not
yet have sufficient experience with this accounting method to predict its impact
on income seasonality. The Company plans its capital and operating expenditures
based on its expectations of future revenues. If revenues are below expectations
in any given quarter, the Company may be unable to adjust expenditures to
compensate for any unexpected revenue shortfall. The Company's business could
suffer as a consequence.
Environmental
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 or at the site, including the
presence of asbestos containing materials. Insurance for such matters may not be
available.
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 (as on-site property manager),
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. The liability may be imposed even if
the original actions were legal and Insignia did not know of, or was not
responsible for, the presence of such hazardous or toxic substances. Insignia
may also be solely responsible for the entire payment of any liability if it is
subject to joint and several liability with other responsible parties who are
unable to pay. Insignia may be subject to additional liability if it fails to
disclose environmental issues to a buyer or lessee of property. 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.
18
Existing Debt
The loans under the revolving credit facility bear interest at LIBOR plus a
margin that varies according to the ratio of debt to consolidated net income
before interest expense, taxes, depreciation, amortization and specified other
costs. Insignia is vulnerable to increases in interest rates as a result of
either increases in the base rate or the variable LIBOR margin. At December 31,
2001, the amount outstanding on the revolving credit facility was $149 million,
and the interest rate on amounts drawn was approximately 4.9%. A 100 basis
points increase in the effective interest rate would have increased interest
expenses by $1.3 million for the year ended December 31, 2001. The margin above
LIBOR for subsequent draws or rollovers is 2.50%. The Company used existing cash
to repay $32 million under the facility in January 2002.
The revolving credit agreement contains covenants that limit actions. These
covenants could materially and adversely affect Insignia's ability to finance
its future operations or capital needs or to engage in other business activities
that may be in its best interest. The covenants limit Insignia's ability to,
among other things:
o engage in new lines of business or substantially alter its method of
doing business;
o encumber assets;
o enter into sale and leaseback transactions;
o merge, consolidate or dispose of a substantial part of assets;
o dispose of stock in subsidiaries or have subsidiaries issue stock;
o engage in acquisitions, make loans or advances, or extend guarantees or
enter into other investments;
o incur indebtedness;
o declare or pay dividends or make other distributions to shareholders;
o enter into transactions with affiliates; and
o engage in any real estate development activities except through special
purpose unrestricted subsidiaries whose capitalization is subject to
aggregate limits
The revolving credit agreement also contains covenants concerning the
maintenance of a minimum consolidated net worth, a maximum ratio of total debt
to consolidated net income before interest, taxes, depreciation and amortization
and specified other costs, and certain other financial ratios.
Insignia's ability to comply with these covenants may be affected by events
beyond its control, and it cannot be sure that it will be able to comply. A
breach of any of these covenants could result in a default under the revolving
credit agreement and, potentially, an acceleration of the obligation to repay
the indebtedness under the revolving credit agreement.
Anti-Takeover Considerations
Certain provisions of the Company's Certificate of Incorporation and
By-Laws could have an anti-takeover effect. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage, delay, defer or prevent a takeover attempt, including an attempt
that might result in a premium over the market price for its common stock. These
provisions include:
o Staggered Board of Directors - The Company's Board of Directors is
divided into three classes serving staggered three-year terms. Because
the Company's Board of Directors is divided into classes, members of
its Board of Directors may only be removed from office prior to the
expiration of their terms if such removal is for "cause" and only by
the vote of holders of a majority of the outstanding voting stock. The
classified board provision could increase the likelihood that, in the
event an outside party acquired a controlling block of Insignia's
capital stock or initiated a proxy contest, incumbent directors
nevertheless would retain their positions for a substantial period,
which may have the effect of discouraging, delaying or preventing a
change in control of Insignia.
o Stockholder Meetings - No action may be taken by the Company's
stockholders except at an annual or special meeting of stockholders and
no action may be taken by written consent in lieu of a meeting. Special
meetings of the Company's stockholders may be called only by the
Company's Chairman, President or Chief Executive Officer or by a
majority of the Board of Directors. This limitation makes it more
difficult for stockholders to take action opposed by the Board of
Directors.
o Stockholder Proposals - The Company's stockholders must follow an
advance notification procedure for certain stockholder nominations of
candidates for the Company's Board of Directors and for certain other
business to be conducted at any stockholders' meeting. This limitation
on stockholder proposals could inhibit a change of control.
19
o Preferred Stock - The Company's Certificate of Incorporation authorizes
the Company's Board of Directors to issue up to 20,000,000 shares of
preferred stock, in one or more series, having such rights and
preferences as may be designated by the Company's Board of Directors,
without stockholder approval. The issuance of such preferred stock
could inhibit a change of control. At December 31, 2001, 250,000 shares
of Convertible Preferred Stock were outstanding. The approval of
holders of at least two-thirds of the outstanding shares of Convertible
Preferred Stock would be required in order to authorize, effect or
validate any amendment, alteration or repeal of any of the provisions
of the Company's Certificate of Incorporation or By-laws that would
materially affect the preferences, rights or powers of the Convertible
Preferred Stock.
o Delaware Anti-takeover Statute - Section 203 of the Delaware General
Corporation Law restricts certain business combinations with interested
stockholders upon their acquiring 15% or more of the Company's common
stock. This statute may have the effect of inhibiting a non-negotiated
merger or other business combination.
Employees
The growth of the Company's business is largely dependent upon its ability
to attract and retain qualified personnel in all areas of its business,
particularly high-production real estate brokers. If the Company is unable to
attract and retain such qualified personnel, it may be forced to limit its
growth, and its business, financial condition or results of operations could
suffer. The pace of change within the Company (i.e. organizational and
technological) could impact its ability to retain personnel.
Insurance
The Company has the types of insurance coverage, including comprehensive
general liability and excess umbrella liability insurance, that it believes are
appropriate for a company in the lines of business in which it operates. The
Company's management uses its discretion in determining the amounts, coverage
limits and deductibility provisions of appropriate insurance coverage on the
Company's properties and operations at a reasonable cost and on suitable terms.
This might result in insurance coverage that, in the event of a substantial
loss, would not be sufficient to pay the full value of the damages suffered by
the Company.
Lack of Terrorism Insurance
In the wake of September 11th, commercial insurance underwriters have begun
to exclude acts of terrorism from commercial property liability insurance and/or
to offer such coverage at exorbitant rates. The lack of reasonably priced
terrorism insurance could severely limit the availability of debt and equity
capital to finance building acquisitions, new development and property
renovations, particularly for high-profile real estate in markets such as New
York City, London and Paris. The Company's principal investment activities and
investment sales business would potentially be affected, as buyers of real
estate would be unable to close on building acquisitions. The U.S. real estate
industry has mounted a lobbying campaign to persuade Congress to address the
urgent need for commercial terrorism insurance. However, as of March 20, 2002,
Congress had not taken any action.
EMPLOYEES
Insignia has approximately 6,500 employees worldwide, including employee
brokers and other qualified real estate agents and sales associates.
Approximately 5,000 employees are located in the U.S. and the remaining
approximately 1,500 employees are located in Europe, Asia and Latin America.
Insignia believes that its employee relations are excellent.
20
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 41 Chairman of the Board; Chief Executive Officer
Stephen B. Siegel 57 Director; President; Chairman and Chief Executive Officer of
Insignia/ESG, Inc.
James A. Aston 49 Chief Financial Officer
Jeffrey P. Cohen 34 Executive Vice President
Frank M. Garrison 47 Office of the Chairman; President of Insignia Financial Services,
Inc.
Adam B. Gilbert 49 Executive Vice President; General Counsel; Secretary
Ronald Uretta 46 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 the Company's former parent from its
inception in August 1990 until the AIMCO merger in September 1998 and as
Chairman and Chief Executive Officer of the 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 the
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 the Company's 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 the Company's 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 Vice President of Insignia Financial
Services, Inc. He was a Senior Vice President of the Company's 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 held the title 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 the Company's 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 the Company's former parent in January
1992.
Adam B. Gilbert has been General Counsel and Secretary of Insignia since
its inception in May 1998 and Executive Vice President of Insignia since August
1998. Mr. Gilbert also serves as a Senior Vice President of Insignia/ESG. He was
General Counsel and Secretary of the Company's 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 the Company's
former parent from January 1992 until September 1998 and Chief Operating Officer
of the 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.
21
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
Insignia Bourdais 160 Boulevard Haussmann, Paris 875,000 17,500 December 2010
Insignia 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 2012. 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.
Insignia acquired Realty One in October 1997. In connection with the
acquisition, the sellers of Realty One agreed to indemnify the Company for any
loss arising from the Re/Max International. The Re/Max International case was
tried before a jury in 2000, resulting 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 the amount of approximately
$6.7 million, as agreed to by the parties; in November 2001, the Sixth Circuit
affirmed the terms of that judgment. In 2000, the sellers of Realty One funded
the initial cash portion of the settlement, totaling approximately $3.7 million,
on behalf of Realty One pursuant to their indemnification obligations to
Insignia.
In the course of defending the Re/Max suit, Insignia incurred certain legal
fees for which the sellers of Realty One had agreed to reimburse to Insignia
under the terms of the indemnification. In July 2001, Insignia reached a
settlement with the sellers of Realty One regarding the Company's indemnity
claim. The terms of the settlement required the sellers to pay $2 million to
Insignia as reimbursement for certain professional fees incurred in connection
with the Re/Max suit and this payment was collected in October 2001. The Company
incurred a one-time charge of $1.5 million in the second quarter of 2001 for
unrecovered costs stemming from the Re/Max suit. As a condition to the
settlement agreement, the sellers of Realty One agreed to fund the remaining $3
million cash portion of the Re/Max settlement on behalf of Realty One pursuant
to the indemnification to Insignia. The remaining payment is to be made by the
sellers of Realty One in semi-annual installments over the four years ending in
September 2005. The Company was provided with promissory notes that could be
entered against the sellers in the event of non-payment of these amounts.
As part of the indemnity settlement, Insignia also agreed to share with the
sellers in the costs and expenses and any potential judgment or settlement of
two similar cases brought by individual Re/Max franchisees. One of these cases
was settled in late 2001 at a cost of approximately $30,000 to the Company.
In January 2002, Insignia sold the Realty One business to a third party.
Insignia retains the obligation to defend against the remaining case and has
indemnified the buyer for costs associated with all Re/Max litigation. Insignia
continues to vigorously defend the remaining action.
22
ORDINARY COURSE OF BUSINESS 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, the Company's former parent entered into a Merger Agreement with
Apartment Investment and Management Company ("AIMCO"), and one of AIMCO's
subsidiaries, pursuant to which the former parent was merged into AIMCO. Shortly
before the merger, the 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.
Since the merger transaction in October 1998, there have been no related
claims except for an examination of the federal income tax returns of the former
parent being conducted by the Internal Revenue Service for the years ended
December 31, 1996 and 1997 and the period ended October 1, 1998. This
examination was concluded in November 2001. Insignia paid approximately $1.1
million upon final settlement, pursuant to the examiner's report.
In December 2001, the Company entered into a stock purchase agreement with
Real Living, Inc., the purchaser, that provided for the sale of 100% of the
stock of Realty One and its affiliated companies. Such affiliated companies
included First Ohio Mortgage Corporation, Inc., First Ohio Escrow Corporation,
Inc. and Insignia Relocation Management, Inc. As a part of sale, the Company
agreed generally to indemnify the purchaser against all losses up to the
purchase price (subject to certain deductible amounts), resulting from the
following: (i) breaches by the Company of any representations, warranties or
covenants in the stock purchase agreement; (ii) pre-disposition obligations for
goods, services, taxes or indebtedness except for those assumed by Real Living,
Inc.; (iii) change of control payments made to employees of Realty One; and (iv)
any third party losses arising or related to the period prior to the
disposition. In addition, the Company provided an indemnification for losses
incurred by Wells Fargo Home Mortgage, Inc. ("Wells Fargo") and/or the purchaser
in respect of (i) mortgage loan files existing on the date of closing; (ii)
fraud in the conduct of its home mortgage business; and (iii) the failure to
follow standard industry practices in the home mortgage business. The aggregate
loss for which the Company is potentially liable to Wells Fargo is limited to
$10 million and the aggregate of any claims made by the purchaser and Wells
Fargo shall not exceed the purchase price. As of March 20, 2002, the Company is
not aware of any matters that would give rise to a claim under these warranties
and indemnities.
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 2001.
23
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
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 2000 and 2001:
CALENDAR PERIOD HIGH LOW
- --------------- ---- ---
2000
First Quarter.................................. $16.63 $7.56
Second Quarter................................. $13.75 $9.75
Third Quarter.................................. $11.25 $9.19
Fourth Quarter................................. $11.94 $9.50
2001
First Quarter.................................. $13.24 $11.30
Second Quarter................................. $12.82 $10.45
Third Quarter.................................. $12.80 $9.50
Fourth Quarter................................. $10.95 $9.15
The closing sales price for Insignia's common stock on March 1, 2002, as
reported on the New York Stock Exchange, was $10.58. The Company's transfer
agent is First Union National Bank, 1525 West W. T. Harris Boulevard. Suite 3C3,
Charlotte, North Carolina 28288. As of March 1, 2002, there were approximately
1,500 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.
Sales of Unregistered Equity Securities
In connection with the December 2001 acquisition of Groupe Bourdais in
France, the Company issued 402,645 shares of the Company's common stock (valued
at a price of $9.93 per share) as partial consideration for the purchase. The
remainder of the base purchase consideration, totaling approximately $17.4
million, was paid in cash at closing. Additional purchase consideration of up to
approximately $28 million, payable over the three years ending December 31,
2004, is contingent upon the future performance of the Bourdais operation. The
Company has committed to pay the sellers a portion of the potential earnout (up
to approximately $2.3 million) in shares of the Company's common stock.
The shares of the Company's common stock were issued in the acquisition to
the existing shareholders of Groupe Bourdais, none of whom were U.S. persons (as
defined in Rule 902 promulgated under the Securities Act of 1933, as amended).
Insignia issued such unregistered securities in reliance upon the exemption
provided by Regulation S promulgated under the Securities Act of 1933, as
amended.
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 2001, approximately 160,000 shares of
common stock were sold under this plan at an average price of approximately
$9.23 per share.
24
Stock Repurchases
At December 31, 2001, 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. In
2001, the Company paid cash dividends of $1 million and stock dividends of
$250,000 through the issuance of 25,000 shares of the Company's common stock.
25
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of
Insignia for the years ended December 31, 2001, 2000, 1999, and of those
Insignia businesses included in the Company's September 1998 spin-off for the
years ended December 31, 1998 and 1997. The selected financial data for all
periods presented has been restated to segregate the results of Realty One on a
discontinued basis. Operating results for the years ended December 31, 2001 and
2000 are presented in compliance with the requirements of the SAB 101 accounting
change. All prior years are presented as previously reported without
restatement.
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. Certain amounts for prior years have been reclassified to conform to the
2001 presentation.
FOR THE YEAR ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Total revenues $ 741,749 $ 781,211 $ 576,319 $ 404,067 $ 271,470
Service revenues 737,780 775,999 574,442 404,067 271,470
Income from continuing operations 5,721 21,229 7,724 8,073 12,692
(Loss) income from discontinued operation (19,229) 558 2,574 2,980 363
(Loss) income before cumulative effect of a
change in accounting principle (13,508) 21,787 10,298 11,053 13,055
Cumulative effect of a change
in accounting principle -- (30,420) -- -- --
Net (loss) income (13,508) (8,633) 10,298 11,053 13,055
PER SHARE AMOUNTS - ASSUMING DILUTION (1):
Income from continuing operations $ 0.20 $ 0.87 $ 0.34 $ 0.37 N/A
(Loss) income from discontinued operation (0.82) 0.02 0.12 0.13 N/A
(Loss) income before cumulative effect of a
change in accounting principle (0.62) 0.89 0.46 0.50 N/A
Cumulative effect of a change
in accounting principle -- (1.24) -- -- N/A
Net (loss) income (0.62) (0.35) 0.46 0.50 N/A
OTHER DATA:
Cash provided by operating activities $ 26,705 $ 80,368 $ 57,977 $ 35,857 $ 31,370
Cash used in investing activities (25,809) (74,044) (171,107) (128,140) (87,667)
Cash provided by financing activities 9,985 59,023 121,443 140,194 61,767
EBITDA (2) 56,262 77,777 51,503 40,359 35,244
Net EBITDA (2) 54,458 78,046 48,871 44,741 36,382
AT DECEMBER 31,
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2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 131,860 $ 122,196 $ 61,600 $ 5