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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, 2002
[ ] 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 February 28, 2003 there were 23,309,450 shares of common stock outstanding.
Based on the reported closing price of $10.91 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 $205 million.
The information required in Part III of this Report will be included in an
amendment to this Form 10-K to be filed with the Securities and Exchange
Commission on or before April 30, 2003.
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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 a leading provider of
international real estate and real estate financial services, with operations in
the United States, the United Kingdom, France, 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 offer a diversified array of
services including commercial leasing, sales brokerage, corporate real estate
consulting, property management, property development and re-development,
apartment brokerage and leasing, condominium and cooperative apartment
management and real estate oriented financial services. In 2002, Insignia's
primary real estate service businesses included the following: Insignia/ESG
(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 (New York
apartment brokerage and leasing) and Insignia Residential Group (New York
condominium, cooperative and rental apartment management). Insignia also offers
commercial real estate services throughout continental Europe, Asia and Latin
America. The New York-based residential businesses of Insignia Douglas Elliman
and Insignia Residential Group were sold on March 14, 2003 (see further
discussion under the caption "Discontinued Operations" in Item 1 of this
Report).
Insignia enjoys an unrivaled position in the New York-London-Paris business
center axis. New York, London and Paris each represent world financial capitals
and key centers for international investment capital flows and business
activity. These cities are prime generators of real estate activity on a
worldwide basis. In addition to traditional real estate services, Insignia has
historically deployed its own capital, together with the capital of third party
investors, in principal real estate investments, including co-investment in
existing property assets, real estate development and managed private investment
funds. The Company's real estate service operations and principal real estate
investment activities are more fully described below.
REAL ESTATE SERVICES
Commercial Real Estate Service Operations
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. The Company's commercial services operations generated
aggregate service revenues of $577.5 million in 2002, representing 81% of the
Company's total service revenues for the year. The 2002 results include revenues
of $43.1 million from Insignia Bourdais, which became a part of Insignia in
January 2002.
United States
The Company's U.S. commercial real estate services are rendered under the
Insignia/ESG brand. Insignia/ESG represents the Company's largest business,
accounting for approximately 55% of the Company's total service revenues for the
2002 year. U.S. commercial service revenues totaled approximately $392.7 million
in 2002, down 20% from $492.8 million in 2001. U.S. commercial operations in
2002 were hindered by lingering weakness in many key markets that caused sharp
declines in leasing activity.
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 is active to
varying degrees in 54 U.S. markets, including markets in which it has affiliate
relationships with local service providers. Affiliate relationships are
established in markets where Insignia
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wants to offer services for its multi-market clients without owning the local
operations. The Company has U.S. affiliations with service providers in the
Pittsburgh, Baltimore, Seattle, Indianapolis, Princeton, N.J. and
Raleigh-Durham, N.C. markets. Also, in November 2002 the Company established an
affiliation with Toronto-based JJ Barnicke Limited, which provides real estate
services in 23 markets throughout Canada.
The Company's move into full-service brokerage commenced in 1996 with the
acquisition of Edward S. Gordon Company Incorporated in New York City and
subsequent expansion of brokerage operations nationwide. The Company's growth in
the late 1990's was fueled by a combination of acquisitions of regional
commercial real estate service companies and recruitment of professional talent
in lease and property services. Since 1997, 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. The Company made no
domestic acquisitions in 2002 and only one - Dallas-based Baker Commercial
Realty - in 2001.
The Company prides itself on the consistent, high-quality delivery of its
services across geographic markets, property types and disciplines. 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 2002,
the Company completed U.S. sales and leasing transactions valued at
approximately $15.2 billion, including more than $5.0 billion of commercial
property sales and financing transactions. During 2002, Insignia/ESG represented
such major corporate clients as Bank of New York, American International Group,
L'Oreal, Lehman Brothers, Fleet Bank, Marsh & McLennan, Deutsche Bank,
Metropolitan Life Insurance, Interpublic Group, Raytheon Corp., Deloitte &
Touche and many others. The Company also provides property services for
institutional clients owning approximately 235 million square feet of commercial
real estate in the U.S., including 158 million square feet of office, 55 million
square feet of industrial, 16 million square feet of retail and 6 million square
feet of mixed-use properties. In 2002, the Company's largest property services
clients included The Irvine Company, Metropolitan Life Insurance Co., Teachers
Insurance and Annuity Association, LendLease, Invesco and Phelps-Dodge.
In 2002, Insignia/ESG sustained its market-leading position in New York
City. For the seventh year in a row, Insignia/ESG accounted for the most
transactions on the Crain's New York Business annual list of the top 50
Manhattan leasing transactions. The Company was responsible for 17 of the top 50
transactions in 2002, including the largest transaction overall and three of the
top five, according to a list published in the February 10, 2003 issue of
Crain's New York Business.
Europe
The Company's European businesses consist of commercial real estate
operations in the United Kingdom, France, Germany, Italy, Belgium, Spain,
Republic of Ireland and the Netherlands. European operations accounted for
approximately 25% of Insignia's total service revenues in 2002, producing
service revenues of $178.5 million, up 53% from $116.4 million in 2001. The
European operations concluded sales and lease transactions valued at
approximately $22.0 billion during 2002, including approximately $13.0 billion
in investment transactions. For 2002, the United Kingdom produced $121.7 million
in service revenues, or approximately 68% of total European results. The
continental European businesses contributed service revenues of $56.7 million,
of which $43.1 million was derived from France.
The Company's European operations were materially enhanced in December 2001
with the acquisition of Groupe Bourdais, one of France's premier real estate
service companies. Groupe Bourdais adopted the name Insignia Bourdais at
closing. Insignia Bourdais has five offices in the greater Paris region and also
maintains offices in the Aix-en-Provence, Lyon and Marseille markets and has
affiliate relationships in 20 additional markets throughout France.
The Company's U.K. subsidiary, Insignia Richard Ellis, is among the
foremost 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,
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Liverpool and Jersey, and holds a 10% ownership interest in Insignia Richard
Ellis Gunne, an Irish real estate services company with offices in Dublin, the
Republic of Ireland and Belfast, 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. In 2002, Insignia
Richard Ellis sustained its longstanding place as a premier service provider in
central London for both investment sales and property leasing.
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 since 1998 in the following locations:
Frankfurt, Germany; Milan and Bologna, Italy; Brussels, Belgium; Madrid and
Barcelona, Spain; and Amsterdam, the Netherlands. As part of its efforts to
build a premier real estate service capability on the European continent,
Insignia significantly expanded its resources in Spain in 2002. Key moves
included opening an office in Barcelona and augmenting its existing Madrid
office with a team of consulting professionals formerly associated with Arthur
Andersen Real Estate. Insignia committed to invest up to $2.7 million in Spain
to acquire a company formed by the former Arthur Andersen consulting team, to
recruit additional professional talent and for working capital for the Madrid
and Barcelona offices. In all, a total of 35 professional fee earners have been
added to Insignia's operations in Spain. These moves are expected to increase
the Company's transaction and consulting services in Spain in 2003 and beyond.
In 2002, the Company also forged affiliate relationships - similar to those in
the U.S. - with service firms in Denmark, Sweden and South Africa.
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 service company founded
in 1988. Insignia further extended its Asian reach in 2001 with the acquisition
of Brooke International's affiliated operations in India. The Brooke businesses
operate under the Insignia Brooke name and have offices in the following
locations: Hong Kong, Beijing and Shanghai, China; Bangkok, Thailand; Mumbai,
Hyderabad, Bangalore, Chennai and Delhi, India; and Manila, the Philippines. The
Company extended its service capability into Latin America in 2001 through the
acquisition of Grupo Inmobiliario Inova ("Inova"), headquartered in Mexico City.
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. The Company's businesses
in Asia and Latin America specialize in commercial leasing, tenant
representation, project coordination and supervision, real estate valuations,
asset management and strategic advisory services.
Insignia Brooke along with the Japan operation and Insignia/ESG de Mexico
represent the Company's strategic platforms from which to serve its existing
clients' real estate needs in Asia and Latin America. The development of the
Asian and Latin American businesses has been constrained by the global economic
slowdown that has persisted for the past two years. These businesses
collectively incurred operating losses of $4.1 million in 2002, up slightly from
losses of $3.9 million in 2001. Operating losses are expected to continue -
albeit at a reduced level - until there is sustainable improvement in the global
real estate market.
Affiliate Program
In 2001, Insignia launched an affiliate program in order to extend its
reach into secondary U.S. markets where the Company wants to meet the needs of
its clients without investing significant capital for owned operations. Under
this program, regional service providers agree to serve as Insignia's exclusive
representative within a market and to adopt Insignia's branding, marketing
standards and governance protocols. Insignia has no economic interest in the
regional service providers, which pay Insignia a fee for joining the affiliate
program. In 2002, Insignia established U.S. affiliations with service providers
in Seattle, WA, Raleigh-Durham, NC, Princeton, NJ and Indianapolis, IN, and
international affiliations in Canada, Denmark, Sweden and South Africa. In
Canada, the Company entered into an alliance with Toronto-based JJ Barnicke
Limited - one of Canada's premier real estate providers - to serve as Insignia's
exclusive representative throughout Canada. Separately, the Company entered into
an affiliation in 2002 with Blenheim Bishop, one of central London's leading
residential real estate service firms. Under this affiliation, Insignia will
refer residential opportunities to Blenheim Bishop, and Blenheim Bishop will
refer commercial opportunities to Insignia's U.K. offices. In 2001, affiliates
were established in Pittsburgh, PA, Baltimore, MD, Richmond, VA and 20 affiliate
offices in France were acquired as part of the Groupe Bourdais acquisition. In
3
October 2002, Insignia agreed to end its affiliation with the Richmond, VA
service provider due to philosophical differences over future expansion plans.
Commercial Services
The full range of commercial services provided by the Company world-wide
include the following:
Tenant Representation -- acquisition or disposition of leased or owned
space on behalf of space users
Agency Leasing -- marketing of available space within commercial properties
on behalf of owners/landlords and the consummation of leases with tenants
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
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
Leasing (tenant representation and agency), investment sales, property
management and consulting services collectively comprised over 90% of the
Company's total service revenues for 2002. Leasing services represent the
Company's most significant service line, accounting for approximately $320.0
million, or 45%, of the Company's total service revenues for 2002. Insignia's
U.S. commercial business mix is more heavily concentrated toward leasing
services, tenant representation in particular, than the Company's other
businesses. Leasing services were responsible for approximately 68% of U.S.
service revenues for 2002. Revenues from investment sales and consulting are
also significant. In 2002, investment sales and consulting services accounted
for over $150.0 million of service revenues, or approximately 20% of Insignia's
total service revenues for the period.
Market Trends
United States
U.S. commercial leasing markets in 2002 were the softest in more than a
decade. The low-growth economy, coupled with malaise in the financial markets
and lingering effects of the September 11 terrorist attacks caused companies to
become extremely hesitant with respect to capital spending and expansion plans.
As a result, leasing activity in many U.S. markets reached a 10-year low, with
most demand driven by lease expirations. Excess space proliferated in many
markets as retrenching companies offered surplus space for sublease in huge
quantities. The unprecedented sublease supply caused availability rates to rise
sharply and rental rates to fall. U.S. markets remain fundamentally soft at the
outset of 2003.
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Europe
The major business centers of Europe saw leasing activity curbed sharply by
global economic weakness. London, due to the predominance of financial services
industries, in 2002 experienced a substantial decline in leasing activity,
coupled with increasing availability and declining rents. Paris was less
severely affected than most other major European business centers, with total
leasing activity off by about one-third compared with 2001.
In stark contrast to the leasing markets, the European investment markets
remained extremely robust in 2002. Historically low interest rates and high
current property yields relative to other investment alternatives attracted
strong international capital flows to London, Paris and other European business
centers. The disparity between leasing and investment markets has continued into
2003.
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, Trammell 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. States. 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, Barclays, Marsh & McLennan, Metropolitan Life Insurance, Deutsche Bank,
The New York Times Company, Empire Blue Cross Blue Shield, Waterhouse
Securities, Citigroup, Bank of New York, Raytheon Corp., Deloitte & Touche,
Interpublic Group, L'Oreal, Fleet Bank and many others.
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As previously noted, the Company arranged the largest office-leasing
transaction in Manhattan, three of the top five and 17 of the top 50 in 2002,
according to a list published in the February 10, 2003 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 six of the past seven years, including in 2002 (awarded for the
Company's representation of The New York Times Company in connection with a new
corporate headquarters development). The Company has also garnered Retail Deal
of the Year honors in 2001 and 2002. The Company believes that its outstanding
track record in New York 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 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.
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. The Company
believes that its U.K. subsidiary's operations and reputation place Insignia at
a strategic advantage over other primary competitors including DTZ Jean Thouard,
Jones Lang LaSalle, CB Hillier Parker, Knight Frank, Cushman & Wakefield and FPD
Savills. In France, the real estate marketplace is led by Vendome Rome Auguste
Thouard and Insignia Bourdais. CB Richard Ellis (tenant representation), Jones
Lang LaSalle (investment and agency leasing), Cushman & Wakefield, DTZ Jean
Thouard, Soprec and Keops are other key competitors in France. In Spain, the
major competitors are CB Richard Ellis, Aguirre Newman and Jones Lang LaSalle.
The Company believes that its service lines in Spain are unique through combined
transactional expertise and the specialist consulting skills of the former
Arthur Andersen employees.
Residential Real Estate Service Operations
The Company's residential real estate services have been performed
throughout the New York City marketplace by Insignia Douglas Elliman and
Insignia Residential Group. These businesses, which were sold on March 14, 2003
(see "Discontinued Operations" below), provide services including apartment
sales, rental brokerage, condominium and cooperative apartment management and
mortgage brokerage services. In 2002, these residential businesses produced
aggregate service revenues of $133.7 million, or approximately 19% of the
Company's total service revenues.
New York City Apartment Sales and Rentals
Insignia Douglas Elliman provides apartment sales and rental brokerage
services in the New York City residential cooperative, condominium and rental
apartment markets. In addition to New York City, Insignia Douglas Elliman also
operates in upscale suburban markets in Long Island (Manhasset, Locust Valley
and Port Washington/Sands Point). Through Insignia Douglas Elliman, the Company
has commanded a prominent position in the New York metropolitan marketplace with
gross sales volume in 2002 of approximately $2.8 billion. In 2002, Insignia
Douglas Elliman generated service revenues of approximately $107.1 million, up
15% from $92.9 million in 2001.
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New York City Apartment Management
Insignia Residential Group operates as the largest manager of cooperative,
condominium and rental apartments in the New York metropolitan area, providing
full service third-party fee management for more than 250 properties, comprising
approximately 60,000 residential units. Among the notable properties currently
managed by Insignia Residential Group in the New York metropolitan area are the
Worldwide Plaza, London Terrace and Peter Cooper Village/Stuyvesant Town, an
11,000-unit residential community owned by Metropolitan Life. 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 generated
total service revenues of $26.5 million in 2002.
REAL ESTATE PRINCIPAL INVESTMENT ACTIVITIES
Insignia, through Insignia Financial Services, has historically invested in
real estate assets and real estate debt securities. Insignia has engaged in real
estate investment generally through: (i) investment in operating properties
through co-investments with various clients or, in limited instances, by itself;
(ii) investment in and development of commercial real estate on its own behalf
and through co-investments; and (iii) minority ownership in and management of
private investment funds, whose investments primarily consist of securitized
real estate debt. While the Company is continuing to invest in debt securities
through the private investment funds, it is currently not engaged in new
investments in operating properties or development assets. The Company intends
to continue investment in existing property assets as needed or required by
current business plans.
At December 31, 2002, Insignia's co-investment partners included the
following notable business entities: Citigroup, GE Investments, ING Barings,
Blackacre Capital Management, Lennar, Praedium, Lone Star Opportunity Fund,
Prudential, Whitehall Street Real Estate, Walton Street and Investcorp. As of
December 31, 2002, the Company's real estate investments totaled $134.1 million,
consisting of the following: (i) $21.1 million in minority-owned operating
properties; (ii) $85.2 million of real estate carrying value attributable to
three investment entities consolidated by Insignia for financial reporting
purposes; (iii) $10.0 million in four minority owned development properties;
(iv) $1.7 million in a land parcel held for development; and (v) $16.1 million
in minority-owned real estate debt investment funds. The properties owned by the
consolidated entities are subject to mortgage debt of $66.8 million such that
Insignia's equity investment in the properties totaled only $21.7 million at
December 31, 2002. Insignia's investment in consolidated properties includes a
$19.3 million equity investment in a development property in the U.S. Virgin
Islands (discussed under "Development" below).
In addition to venture related investment returns, Insignia generates
revenues from fee-based services provided to the real estate investment
entities. Such revenues generally include property management fees, asset
management fees, development fees, leasing commissions, acquisition fees, sales
commissions or financing fees.
Insignia maintains an incentive compensation program pursuant to which
certain employees, including executive officers, participate in the profits
generated by its real estate investments, through grants of either equity
interests (at or about the time investments are made) or contractual rights to
participate in proceeds from successful investments.
Such grants generally consist of an aggregate of 50% to 63.5% of the cash
proceeds paid to Insignia after Insignia has recovered its full investment plus
a 10% per annum return thereon. Such percentage includes discretionary incentive
payments of 5% to 10% paid upon disposition to certain employees who contributed
to the success of an investment. With respect to the private investment funds,
employees are collectively entitled to share 55% to 60% of proceeds received by
Insignia in respect of its promoted profits participation in those funds.
Employees share only in promoted profits of the private investment funds and are
not entitled to any portion of earnings on the Company's actual investment
(before promotes). Gains on sales of real estate and equity earnings are
recorded net of employee participation and discretionary incentive payments.
Payments to employees for years 2002, 2001 and 2000 totaled $8.1 million, $10.8
million and $7.9 million, respectively.
The Compensation Committee of the Company's Board of Directors, with the
advice of third party professionals, has completed a review of policies relating
to management participation in the Company's real estate investment program in
the context of Insignia's entire incentive compensation program for senior
management. The Committee has determined that all future promote interests
granted to members of senior management shall have a
7
co-investment requirement (such that any such individual has money at risk) and
a netting requirement (such that losses on poor investments are netted with
gains on successful investments). These requirements apply to investment
transactions initiated (but not necessarily consummated) by the Company on and
after July 29, 2002. The Company's principal investment programs are more fully
described below.
Property Investment
The Company maintains minority investments in operating real estate assets
including office, retail, industrial, apartment and hotel properties. As of
December 31, 2002, Insignia held equity investments totaling $21.1 million in 30
minority owned property assets. These properties consist of approximately 6.0
million square feet of commercial property and 1,967 multi-family apartment
units and hotel rooms. The Company's minority ownership interests in
co-investment property range from 1% to 33%. Gains realized from sales of real
estate by minority owned ventures totaled $4.2 million in 2002, $11.0 million in
2001 and $3.9 million in 2000. Such amounts are included in the caption "equity
earnings in unconsolidated ventures" in the Company's consolidated statements of
operations.
Insignia also consolidates two operating properties, a wholly-owned retail
property located in Norman, Oklahoma and a New York City apartment complex owned
by a limited partnership in which the Company owns a 1% controlling general
partner interest. These two properties contain approximately 155,000 square feet
of commercial space and 420 multi-family apartment units. With respect to the
New York City apartment complex, in addition to its 1% interest, Insignia is
entitled to approximately $1.3 million of the first $7.3 million distributed and
approximately 45% of all additional distributions. In July 2002, Insignia
invested approximately $1.3 million in the second tier limited partnership
owning the New York City apartment complex as a new limited partner pursuant to
a $1.5 million equity financing and the purchase of an existing partners
interest. The remaining equity financing was received in June 2002 from existing
limited partners. Certain executives and other employees of Insignia have the
right to acquire from the Company, at its cost, approximately 50% of the $1.3
million limited partner investment made in July 2002. Such executives and
employees have no other incentive grants or participation rights with respect to
this investment.
Although Insignia's economic interest in the New York City apartment
complex at the time of its initial investment was nominal (until the limited
partners received a return of all invested capital), the Company commenced
consolidating this property in its financial statements as of January 1, 2002
because (i) the partnership agreement for the property-owning partnership grants
the general partner complete authority over the management and affairs of the
partnership, including any sale or refinancing of its sole asset without limited
partner approval, and (ii) accounting principles generally accepted in the
United States require consolidation on the basis of voting control (regardless
of the level of equity ownership).
At December 31, 2002, the carrying amounts of these two consolidated
properties totaled $46.4 million, and non-recourse real estate mortgage debt
totaled $46.8 million. In September 2002, a consolidated retail property was
sold for a $1.3 million net gain. The gain is included under the caption "other
income, net" in the Company's consolidated statements of operations.
Development
The Company's development programs include minority-owned office
development projects and a wholly-owned marina based development located in the
U.S. Virgin Islands.
In July 2002, a subsidiary of the Company acquired three contiguous parcels
of property and related leasehold rights in St. Thomas, U.S. Virgin Islands,
which comprise 32.3 acres of property, including 18 submerged acres with full
water rights. The initial purchase price was approximately $35.0 million, paid
with $18.5 million in cash and $20.0 million borrowed by the subsidiary under a
non-recourse $40.0 million mortgage loan facility. The property is currently
undergoing predevelopment activities together with operating activities of an
existing marina. The property and its debt are consolidated in the Company's
consolidated financial statements. Insignia's equity investment in the property
totaled $19.3 million at December 31, 2002.
In January 2003, Insignia filed the Coastal Zone Management ("CZM")
development permit applications with the appropriate government agencies in St.
Thomas, U. S. Virgin Islands. The permits include the proposal for
re-development and beautification of the former Yacht Haven site at Charlotte
Amalie in St. Thomas. The proposed
8
Yacht Haven re-development envisions the creation of a world-class marina
intended to enhance private and charter yacht traffic to the U.S. Virgin Islands
as well as the development of commercial, retail and entertainment-oriented
properties that will broaden and enhance shopping, dining and recreational
options for tourists and residents. Demolition and construction activities are
expected to commence as soon as final governmental approvals have been received.
Submission of the CZM applications is a significant milestone in the
planned re-development, signaling the commencement of the public review, comment
and final approval process. A public hearing on the project was held in St.
Thomas on March 3, 2003. On March 13, 2003, the CZM Commission of St. Thomas
unanimously approved the Company's permit applications. The Company's permits
are also subject to approval and ratification by both the Governor and the
Legislature of the US Virgin Islands, which is anticipated to occur in April
2003.
Insignia also has minority ownership in four office projects whose
development is directed by the Company and owns a parcel of land in Denver,
located adjacent to one of the office developments, that is held for future
development. Development activities on the four office buildings have been
completed, other than tenant improvements associated with additional leasing.
The following table provides information for the four office development
projects as of December 31, 2002.
DEVELOPMENT PROJECT OWNERSHIP INTEREST OPERATING STATUS SQUARE FEET
------------------- ------------------ ---------------- -----------
Dallas office project 30% 100% leased 125,000
Portland flex project 30% 60% leased 211,000
Denver office project 25% 72% leased 265,000
Portland downtown office project 33% 1% leased 222,500
The Company's only financial obligations with respect to the office
developments, beyond its investment, are partial construction financing
guarantees, backed by letters of credit, totaling $8.9 million. The Company's
investment in the office development assets and land parcel totaled $11.7
million at December 31, 2002. The Company has not initiated any new office
developments since September 2000 and does not currently intend to further
expand this development program.
Private Investment Funds
At December 31, 2002, Insignia had equity investments of $16.1 million in
two private investment funds, Insignia Opportunity Trust ("IOT") and Insignia
Opportunity Partners II, L.P. ("IOP II") and had a commitment to invest an
additional $2.1 million in IOP II. The Company's investment at December 31, 2002
included equity earnings through that date; approximately $2.2 million of cash
associated with that equity earnings was subsequently received in the form of a
distribution in January 2003 (thereby reducing investment book value). IOT
represents a real estate investment that operates through its subsidiary
operating partnership, Insignia Opportunity Partners ("IOP"). The investment
objectives of these funds are to invest primarily in real estate debt securities
with a focus on below investment grade commercial mortgage-backed securities.
The gross carrying value of assets owned by the two funds was approximately
$150.0 million as of December 31, 2002.
IOT completed its deployment of committed capital in 2002 and IOP II had
called $28.2 million of its $48.5 million of total capital commitments at
December 31, 2002. Three executive officers of the Company have committed $2.25
million to IOP II on the same basis as all other investors. Insignia holds
aggregate ownership interests of approximately 13% in IOT and IOP and 10% in IOP
II and is currently entitled to additional profits participations of 10% in IOP
and 5% in IOP II, subject to a return of capital to investors in the case of IOP
II. Insignia's additional profits participations could increase to as much as
30% in IOP and 50% in IOP II, depending on the performance of the funds.
Insignia's earnings from its investments in IOP and IOP II totaled $4.0 million,
$2.6 million and $911,000 in years 2002, 2001 and 2000, respectively. These
earnings are included in equity earnings in unconsolidated ventures (net of
employee incentive participations of $2.0 million, $745,000 and $323,000 in
2002, 2001 and 2000) in the Company's consolidated statements of operations.
9
CB RICHARD ELLIS MERGER AGREEMENT
On February 17, 2003, Insignia entered into an Agreement and Plan of Merger
(the "Merger Agreement") with CBRE Holding, Inc., CB Richard Ellis Services,
Inc. ("CB") and Apple Acquisition Corp., a wholly owned subsidiary of CB,
pursuant to which, upon the terms and subject to the conditions set forth
therein, Apple Acquisition Corp. will be merged with and into Insignia (the
"Merger"), with Insignia being the surviving corporation in the Merger and
becoming a wholly owned subsidiary of CB. The Merger Agreement provides that
Insignia's Certificate of Incorporation and the Bylaws of Apple Acquisition
Corp. will be the Certificate of Incorporation and the Bylaws, respectively, of
the surviving corporation. Under the Merger Agreement, at closing each share of
common stock, par value $0.01 per share, of Insignia (the "Common Stock") will
be converted into the right to receive $11.00 per share in cash (the "Common
Merger Consideration"). In addition, Insignia has the right, but not the
obligation, to sell certain real estate assets (excluding assets of the service
businesses) prior to the closing of the Merger. If Insignia receives more than a
specified amount of cash net proceeds (generally $45.0 million, net of expenses,
plus any amounts contributed or transferred to the entities holding these assets
between February 17, 2003 and the closing of the Merger) for these assets, the
excess net cash proceeds will be paid to holders of Common Stock, options,
warrants and unvested restricted stock as additional Common Merger
Consideration, up to an additional $1.00 per share of Common Stock. There can be
no assurance that Insignia will sell any of these assets or, if it does, that it
will receive more than the specified amount through the asset sales. Additional
Common Merger Consideration above $11.00 per share will be determined based on a
denominator of approximately 26,500,000 common shares, options, warrants and
unvested restricted stock. As a result, excess net cash proceeds of
approximately $6.6 million over the specified amount would be required for each
additional $0.25 increment of Common Merger Consideration. Total net cash
proceeds from asset sales necessary to achieve the maximum $1.00 of additional
Common Merger Consideration would approximate $71.5 million.
The Merger Agreement further provides that all of Insignia's directors will
resign immediately prior to the completion of the Merger. Following the Merger,
Insignia will cease to be a reporting company under the Securities Exchange Act
of 1934, as amended, and its Common Stock will cease to be traded on the New
York Stock Exchange. Consummation of the Merger requires approval by Insignia's
shareholders, CB's receipt of equity and debt financing, the receipt of
regulatory approvals and other customary closing conditions. In connection with
the Merger Agreement, several members of senior management of Insignia (who
collectively own approximately 6.6% of voting shares) entered into Voting
Agreements with CB and Insignia (the "Voting Agreements"), pursuant to which
these individuals agreed to vote their shares in favor of approving the Merger
Agreement, the Merger and the other transactions contemplated by the Merger and
the Merger Agreement and to vote their shares against any acquisition proposal
from a third-party.
In early 2003, Insignia sold two minority-owned assets in the ordinary
course of business and continues to consider or explore potentially selling
certain other existing real estate investments, as permitted by the Merger
Agreement, in an effort to provide additional Common Merger Consideration to the
holders of Common Stock, options, warrants and unvested restricted stock. Due to
the limited time available to market such investment assets for potential sale
prior to the closing of the Merger, which is expected to occur no later than
July 14, 2003, there can be no assurances that any asset sales would not result
in losses.
10
DISCONTINUED OPERATIONS
Sale of Insignia Residential Group and Insignia Douglas Elliman
On March 14, 2003, Insignia completed the sale of its New York-based
residential businesses, Insignia Residential Group and Insignia Douglas Elliman,
to Montauk Battery Realty, LLC. The financial terms of the sale included the
payment of $66.75 million to Insignia at closing and a potential additional $1.0
million receivable one year from closing. In addition, the buyer acceded to
additional contingent earnout obligations of Insignia Douglas Elliman totaling
up to $4.0 million, depending on the future performance of the business.
Insignia will discontinue the operations of these businesses for financial
reporting purposes in the first quarter of 2003. These residential businesses
collectively produced service revenues in 2002, 2001 and 2000 of $133.7 million,
$119.2 million and $134.1 million, respectively. Simultaneous with closing,
Insignia paid down $67.0 million on its senior revolving credit facility,
decreasing outstanding borrowings to $28.0 million.
Sale of Realty One
In 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 closed on January 31, 2002. Proceeds from the sale potentially
total $33.0 million, including approximately $29.0 million in cash received at
closing (before extinguishment of $5.5 million of Realty One debt) and
additional receipts aggregating as much as $4.0 million. The additional receipts
include the following: (i) a $1.0 million reimbursement, collected in February
2002, for Realty One operating losses in January 2002; (ii) a potential earn-out
of as much as $2.0 million receivable over the next two years (depending on the
performance of the Realty One business); and (iii) a $1.0 million operating
lease receivable quarterly over four years for the use of proprietary software
developed by Insignia for an internet-based residential brokerage model. The
$2.0 million earnout is receivable in increments of $1.0 million each for the
2002 and 2003 fiscal years. Based on preliminary financial information for the
2002 year, the first $1.0 million earnout is expected to be achieved in full and
should be received by the Company on or about April 30, 2003, as required by the
terms of the sale. Remaining amounts due to Insignia under the terms of the sale
totaling $2.7 million were included in "other assets" in the Company's
consolidated balance sheet at December 31, 2002.
Insignia discontinued Realty One's operations for financial reporting
purposes and recognized a loss in connection with the sale of Realty One of
$17.6 million (net of applicable tax benefit of $4.0 million) for the year ended
December 31, 2001. In 2002, the Company reported net income of $4.9 million from
discontinued operations, including $265,000 (net of tax) in post-closing
adjustments in the first quarter and $4.7 million in the third quarter from the
reduction of a valuation allowance on the tax benefit on the capital portion of
the loss on sale. The capital loss had been fully reserved in 2001 because of
uncertainty of its deductibility due to loss disallowance rules in the Treasury
Regulations and insufficient income of the appropriate character. In the third
quarter of 2002, it was determined that the loss would be fully deductible for
tax purposes, resulting in the realization of the $4.7 million tax benefit for
financial reporting purposes.
11
CHANGES IN ACCOUNTING PRINCIPLES
Stock-Based Compensation
In September 2002, the Company adopted the fair value expense recognition
provisions of Statements of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, in accounting for its employee stock
options. The accounting change resulted in the expensing of the estimated fair
value of employee stock options granted by the Company, applied on a prospective
basis for all stock options granted on or after January 1, 2002. The Company
previously followed Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB Opinion No. 25, no
compensation expense is recognized when the exercise price of an employee stock
option equals or exceeds the market price at issuance.
The Company issued 290,000 employee options during 2002. The fair value of
these options has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following assumptions: (i) estimated stock price
volatility of 40%; (ii) risk free interest rate of 2.5%; (iii) weighted average
option life of 3.9 years; and (iv) a forfeiture rate of 3%. Under these
assumptions, the aggregate value of the options totaled $842,000, which is
amortizable to expense over the vesting periods of five years. Stock option
compensation expense recognized in 2002 under SFAS No. 123 totaled $154,000.
Insignia does not expense the value of outstanding options issued before January
1, 2002. Information about values of those options and the estimated pro forma
effect if expensed is disclosed in the notes to the Company's consolidated
financial statements included in Item 15 of this Form 10-K. The ultimate impact
of the accounting change on the Company's future earnings will depend on the
number of options issued in the future, as to which the Company has no specific
plan, and the estimated value of each option.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of transferable options and warrants with no vesting
restrictions. This method requires the input of subjective assumptions including
the expected stock price volatility and weighted average expected life of the
options. The Company's employee stock options have characteristics significantly
different from those of transferable options and changes in the subjective input
assumptions can materially affect the value estimate. The Black-Scholes model is
not the only reliable measure that could be used to determine the fair value of
employee stock options. The Company believes that any and all valuations of
employee stock options will necessarily be estimates.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB") issued SFAS
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. SFAS 141 replaced APB 16 and requires the use of the purchase method for
all business combinations initiated after June 30, 2001. It also provides
guidance on purchase accounting related to the recognition of intangible assets.
Under SFAS 142, goodwill and other intangible assets deemed to have indefinite
lives are no longer amortized but are subject to impairment tests on an annual
basis, at a minimum, or whenever events or circumstances occur indicating
goodwill or indefinite-lived intangibles might be impaired. Other acquired
intangible assets with finite lives continue to be amortized over their
estimated useful lives. The Company adopted SFAS No. 141 for all business
combinations completed after June 30, 2001 and fully implemented SFAS No. 141
and SFAS No. 142 effective January 1, 2002. The Company identified its reporting
units and determined the carrying value of each reporting unit by assigning
assets and liabilities, including the existing goodwill and intangible assets,
to those units as of January 1, 2002 for purposes of performing a required
transitional goodwill impairment assessment within six months of adoption.
In early 2002, the Company performed internal analyses on its reporting
units based on estimated industry multiples and the carrying values of tangible
and intangible assets which demonstrated that the value of the Company's U.S.
commercial operation significantly exceeded its carrying value and that goodwill
of the Asian operation was fully impaired. These analyses also indicated
potential impairment in the Company's European operations and Insignia Douglas
Elliman. The Company engaged Standard & Poor's to value the European and
Insignia Douglas Elliman operations and those appraisals indicated no impairment
in the Company's European operations and partial impairment in Insignia Douglas
Elliman. As a result of this evaluation, Insignia measured impairment for
Insignia Douglas Elliman and the Asian business of an aggregate $30.0 million,
before applicable taxes. The Company recorded a $20.6 million (net of tax
benefit of $9.4 million) transitional goodwill impairment charge in earnings as
the cumulative effect of a change in accounting principle, effective January 1,
2002.
12
The Company concluded its annual impairment test as of December 31, 2002
and that test did not demonstrate further goodwill impairment. The estimation of
business values for measuring goodwill impairment is highly subjective and
selections of different projected income levels and valuation multiples within
observed ranges can yield different results.
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, 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.
At adoption, 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 the net loss for the year ended December
31, 2000. Operating results for the years ended December 31, 2002, 2001 and 2000
are presented in compliance with the requirements of this accounting change.
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.
PRIVATE FINANCING
In June 2002, Insignia executed agreements for $50.0 million of new capital
through a private investment by funds affiliated with Blackacre Capital
Management, LLC ("Blackacre"). The investment consists of $12.5 million in newly
issued shares of Series B convertible preferred stock and a commitment to
provide $37.5 million of subordinated debt. The preferred stock carries an 8.5%
annual dividend, payable quarterly at Insignia's option in cash or in kind, and
is convertible into Insignia common stock at a price of $15.40 per share,
subject to adjustment. The preferred stock has a perpetual term, although
Insignia may call the preferred stock, at stated value, after June 7, 2005. In
February 2000, Blackacre purchased $25.0 million of convertible preferred stock,
which has now been exchanged for a Series A convertible preferred stock with an
8.5% annual dividend and a conversion price of $14.00 per share.
The Blackacre credit facility, which is subordinate to Insignia's senior
credit facility, bears interest at an annual rate of 11.25% to 12.25%, payable
quarterly, depending on the amount borrowed. In July 2002, Insignia borrowed
$15.0 million under the credit facility. The proceeds were used to finance the
purchase of the development property and related leasehold rights in St. Thomas,
United States Virgin Islands (discussed under "Real Estate Principal Investment
Activities" above). Insignia may draw down the remaining $22.5 million of
availability at any time until December 2003. Any further borrowings will bear
interest at 12.25%. The subordinated debt has a final maturity of June 2009.
Blackacre has agreed to the conversion of the convertible preferred stock
into a cash amount equal to the stated value of $100.00 per share plus accrued
and unpaid dividends in the event that the proposed Merger is consummated. In
addition, borrowings under the subordinated credit agreement would be repaid and
the credit agreement terminated simultaneous with the closing of the Merger.
INDUSTRY SEGMENT DATA
Insignia's operating activities encompass two segments in 2002 that include
(i) commercial real estate services, including principal investment activities,
and (ii) residential real estate services. In 2001 and 2000, the Company's
operating activities included internet-based investment initiatives as a third
segment. The Company's segments include businesses that offer similar products
and services and are managed separately because of the distinction between such
services. The accounting policies of the segments are the same as those used in
the preparation of the consolidated financial statements.
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.
13
The commercial segment also includes the Company's principal real estate
investment activities and fund management. Insignia's commercial segment is
comprised of the operations of Insignia/ESG in the U.S., Insignia Richard Ellis
in the U.K., Insignia Bourdais in France (which commenced operations in January
2002) and other businesses in continental Europe, Asia and Latin America. 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. 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. The Company's internet-based
initiatives launched in 1999 were terminated in 2001. Segment operations are
disclosed in the notes to the accompanying consolidated financial statements of
the Company included in Item 15 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.
SEASONALITY
Seasonal factors affecting the Company are disclosed under "Risk Factors"
below and in Item 7 of this Form 10-K, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Nature of
Operations."
2003 OUTLOOK
Insignia's 2002 performance was highlighted by strength in U.K. investment
sales, the Paris market and the New York City residential market, offset by weak
commercial leasing markets in the U.S. and around the world. The leasing
weakness affected U.S. commercial operations more than the Company's other
businesses due to the heavy concentration of leasing services in the Company's
U.S. business mix.
With more than 60% of its business mix in consulting and investment
services, the U.K. operations felt only minimal effect from the weakness in the
London leasing market. The U.K. investment market, in contrast, remained robust,
and Insignia maintained its leading position in this segment. Activity was paced
by the $490 million sale of Shell Mex House - the largest property disposition
in central London last year - as well as the $1 billion sale of the 224-property
Travelodge hotel portfolio.
In France, Insignia's first-year performance following the December 2001
acquisition of Groupe Bourdais exceeded expectations. The results were bolstered
by resiliency within the Paris leasing market, which suffered less severely than
many other world business centers during the 2002 downturn.
U.S. commercial operations in 2002 mirrored the weak state of the economy
and attendant sharp slowdown in leasing activity. Office demand was lackluster
in virtually every major business center, with many markets recording 10-year or
more lows in leasing velocity. Insignia's U.S. business volume fell in step with
the macro-markets. Improved market performance in 2003 is dependent on stronger
sustained economic activity that has not yet emerged. Business confidence has
not been fully restored. A major unknown is the potential effect of the
impending war in Iraq and other geopolitical global tensions, which have
constrained business decision making in early 2003. Such circumstances beyond
the Company's control could inflict a blow to business confidence or return the
economy back into a negative growth mode, which would adversely hinder any
possible recovery of the national leasing markets. Even under an optimistic
scenario for the U.S. economy, the New York market in 2003 is expected to remain
in its softest condition since the 1991-92 period due to the continued
contraction of the financial services sector. Insignia's U.S. commercial
services business will not fully recover in 2003 without a meaningful upturn in
New York.
The outlook in Europe for 2003 remains mixed. Capital-flows into London and
Paris remain strong, driven by historic low interest rates and the high current
property yields relative to other investments. Conversely, leasing markets in
Europe, particularly London, remain sluggish. As a result, the outlook in Europe
for 2003 remains cautious.
Momentum in the New York residential market is expected to continue in 2003.
Demand for New York apartments remains strong, notwithstanding the reduction in
employment levels. We believe many purchasers see New York City housing as a
relatively stable alternative to the stock market, which has posted negative
returns for three years.
14
However, New York real estate values have demonstrated stability in pricing, but
are taking more time to sell. Slow, steady price appreciation - coupled with low
financing costs and a still-low supply of available apartments - should sustain
a continued healthy market in 2003.
RISK FACTORS
Proposed Merger with CB Richard Ellis
On February 17, 2003, Insignia entered into the Merger Agreement with CB
Richard Ellis Services, Inc. and certain of its affiliates. The closing of the
Merger is expected to occur no later than July 14, 2003, unless the Merger
Agreement is earlier terminated in accordance with its terms. The Merger
Agreement imposes numerous limitations on the Company's ability to take actions
without the consent of CB during the interim period between signing of the
Merger Agreement and closing of the Merger. For example, there are limitations
on the Company's ability to enter into new material contracts, to sell, lease or
otherwise dispose of material assets, to make capital expenditures, to hire new
employees, brokers and independent contractors, to increase compensation or pay
bonuses and to incur additional indebtedness.
Since the announcement of the signing of the Merger Agreement, certain
affiliates, employees, brokers and independent contractors of the Company have
terminated or indicated a willingness to terminate their relationship with the
Company. Also, several existing clients of the Company and other prospective
clients have terminated or indicated that they may terminate their relationship
and discussions with the Company. It is possible that further losses of
affiliates, employees, brokers, independent contractors and clients could take
place before the closing of the Merger. In the event that the Merger Agreement
is terminated by any party and the Merger is not consummated, the limitations
imposed on the Company's operations during the interim period and any loss of
employees, brokers, independent contractors and clients may have a material
adverse effect on the Company's business and financial performance, including
impeding the growth of the Company's business, hurting its competitive standing
in the marketplace and resulting in a significant loss of business and
corresponding revenues. In the event the Merger is consummated, there can be no
assurance that the Company will have been able to sell certain real estate
assets for aggregate net cash proceeds in excess of the amount required
(generally $45.0 million, subject to increase) and which would be necessary to
increase the Common Merger Consideration to more than $11.00 per share.
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
Generally, the Company's investment strategy has involved identifying
investment opportunities and investing as a minority owner in entities formed to
acquire such assets. In limited instances, the Company also invested alone in
the acquisition of operating real estate and development property. 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.
15
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 letters of credit and guarantees
mentioned below, is either (i) non-recourse except to the real estate assets of
the subject entity (subject to limited exceptions standard in such non-recourse
financing, including fraud, theft, 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. Insignia's other financial
obligations to all such real estate entities (excluding private investment
funds, discussed below) totaled $11.9 million at December 31, 2002. Such
obligations consisted of the following: (i) $8.9 million of letters of credit
backing construction loans on development properties; (ii) $2.8 million of other
letters of credit and guarantees of property debt; and (iii) $150,000 in future
capital commitments for property improvements.
The Company's principal 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 all real estate investments on a quarterly basis for
evidence of impairment. Impairment losses are recognized whenever events or
changes in circumstances indicate declines in value of such investments below
carrying value and the related estimated cash flows are not sufficient to
recover the Company's investment carrying amount. Generally, Insignia relies
upon the expertise of its own property professionals to assess real estate
values; however, in certain circumstances where Insignia considers its expertise
limited with respect to a particular investment, third party valuations may also
be obtained. Property valuations and estimates of related future cash flows are
by nature subjective and will vary from actual results.
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 2002, 2001 and 2000 from such real
estate entities totaled approximately $8.0 million, $8.5 million and $13.3
million, respectively. Of such fees, $599,000, $684,000 and $788,000 in 2002,
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 formed 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, 2002,
the Company had, through special-purpose subsidiaries, investments totaling
$16.1 million in the two funds and had an obligation to invest an additional
$2.1 million in the second fund. 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 profits participation interests).
The investments made by the funds are subject to risks similar to those to
which the Company and its co-investment activities are subject, 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.
16
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 repurchase agreement financing. Such financing is much like margin
debt, and declines in the value of the assets financed could potentially result
in losses from forced sales by the lender. Insignia's exposure to losses is
limited to its investment.
Urban Concentration of Operations
The Company's operations are concentrated in the world's largest financial
centers, including New York, London and Paris, which produced service revenues
in 2002 of $181.1 million, $97.3 million and $35.2 million, respectively,
(collectively generating 44% of the Company's total 2002 service revenues). 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 11, in one or more of these cities could have a material
adverse effect on the Company's business and financial performance.
International Operations
Insignia derived approximately 26% of its total service revenues from
outside the United States in the fiscal year ended December 31, 2002. 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.
Insignia intends to expand its international activities and to grow the
markets 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.
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency. The British pound and euro
represent the only foreign currencies of material operations as $178.5 million
in total revenues in 2002, or approximately 25% of the Company's total revenues,
were generated in these currencies. All currencies other than the British pound,
euro and dollar comprise less than 1% of annual revenues. Continued changes in
the value of foreign currencies against the dollar will affect the Company's
future reported financial results in dollars. Revenues and expenses of such
subsidiaries have been translated into U.S. dollars at the average exchange
rates prevailing during the periods. Assets and liabilities have been translated
at the rates of exchange at the balance sheet date. Translation gains and losses
are deferred as a separate component of stockholders' equity in accumulated
other comprehensive income (loss), unless there is a sale or complete
liquidation of the underlying foreign investment. Gains and losses from foreign
currency transactions, such as those resulting from the settlement of foreign
receivables or payables, are included in the consolidated statements of
operations in determining net income.
Insignia is authorized to use currency hedging instruments, including
foreign currency forward contracts, purchased currency options and borrowings in
foreign currency. Insignia had in the past borrowed in pounds and euros under
its revolving credit facility and has entered into forward exchange contracts to
purchase pounds for pound denominated payments. These activities were undertaken
to hedge acquisition costs in Europe. The Company did not have any hedges of
foreign currency exposures outstanding at December 31, 2002 or 2001. Economic
risks associated with these hedging instruments include: (i) unexpected
fluctuations in interest rates
17
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 in the future 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 be
assured 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, 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 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
18
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 commission percentages 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.
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.
19
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. In 2002, quarterly
operating results were generally consistent with normal seasonal patterns,
although overall performance continued to suffer from poor global economic
conditions. Conversely, the 2001 and 2000 years did not follow 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 - buoyed by the U.S. commercial business -
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
11. In addition, market disruptions like that of the third quarter of 2001 can
alter or increase the effect of "normal" seasonality. As a result, the Company's
quarter-to-quarter comparisons may be difficult to interpret. 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 Regulation
Under various federal and state environmental laws and regulations, a
current or previous owner or operator of real estate may be required to
investigate and remediate certain hazardous or toxic substances or
petroleum-product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The owner or operator of a site may be liable
under common law to third parties for damages and injuries resulting from
environmental contamination emanating from 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.
Debt
The Company's debt includes outstanding borrowings under its $230.0 million
senior revolving credit facility and a $37.5 million subordinated credit
facility entered into in June 2002 with Blackacre Capital Management, LLC. At
December 31, 2002, the amount outstanding on the senior revolving credit
facility was $95.0 million and the interest rate on amounts drawn was
approximately 4.25%. At that date, Insignia also had outstanding letters of
credit of $11.0 million that are considered outstanding under the terms of the
senior credit facility. Borrowings under the senior 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. The margin above LIBOR was 2.50% at
December 31, 2002. Insignia is vulnerable to increases in interest rates as a
result of either increases in LIBOR or its margin above LIBOR. A 100 basis point
increase in the effective interest rate would increase interest expense on the
senior credit facility by approximately $1.0 million on an annual basis.
20
The $37.5 million Blackacre credit facility is subordinate to Insignia's
senior credit facility and bears interest, payable quarterly, at an annual rate
of 11.25% to 12.25%, depending on the amount borrowed. At December 31, 2002, the
Company had borrowings of $15.0 million outstanding on the subordinated credit
facility at an interest rate of 11.25%. Any further borrowings will bear
interest at 12.25%. Insignia may draw down the remaining $22.5 million of
availability at any time until December 2003. The subordinated debt has a final
maturity of June 2009.
The Company's senior and subordinated credit agreements contain covenants
concerning the maintenance of a minimum consolidated net worth, maximum total
debt, maximum leverage ratios and certain other financial ratios. At December
31, 2002, the Company was in full compliance with all financial covenants. These
and certain other covenants limit actions by the Company and 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
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.
21
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, 2002, 375,000 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 adversely 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.
The soft business environment has heightened competition for key talent.
Competitors have paid signing bonuses and other inducements to attract senior
Insignia professionals. As a result, the Company has had to respond by paying
increased retention bonuses and other perquisites to its premier producers.
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.
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 42 Chairman of the Board; Chief Executive Officer
Stephen B. Siegel 58 Director; President; Chairman and Chief Executive Officer of
Insignia/ESG, Inc.
James A. Aston 50 Chief Financial Officer
Jeffrey P. Cohen 35 Executive Vice President
Frank M. Garrison 48 Office of the Chairman; President of Insignia Financial Services,
Inc.
Adam B. Gilbert 50 Executive Vice President; General Counsel; Secretary
Ronald Uretta 47 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
22
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.
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.
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.
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.
EMPLOYEES
As of December 31, 2002, Insignia had approximately 6,000 employees
worldwide, including employee brokers and other qualified real estate agents and
sales associates. Approximately 4,500 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 good.
23
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 859,000 31,300 April 2004
Insignia Residential Group 675 Third Avenue, New York, NY 2,300,000 72,500 January 2009
The lease on Insignia Richard Ellis's UK headquarters in London expires in
June 2003 and a decision has been made to relocate. In October 2002, an
agreement was reached for Insignia Richard Ellis to take the assignment of a
lease on Kingsley House, Wimpole Street. The lease assignment was formally
completed in February 2003. The Kingsley House space comprises approximately
57,500 square feet with an annual rent of $4.2 million. The existing lease
assignment expires in May 2011. The Company will take occupancy of the new
office space in June 2003.
In June 2002, Insignia Residential Group vacated approximately 15,000
square feet (included in the 72,500 in the table above) under lease at its
headquarters location in New York. The space became available as a result of a
2001 reorganization plan that called for the termination of non-profitable
management assignments and corresponding reductions in related staff. The
Company recorded a $1.0 million charge at that date for the estimated costs of
subleasing this excess office space. All office leases of Insignia Douglas
Elliman and Insignia Residential Group were assumed by the buyer in connection
with their purchase on March 14, 2003.
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
ORDINARY COURSE OF BUSINESS CLAIMS
Insignia and certain subsidiaries are defendants in lawsuits arising in the
ordinary course of business. Management does not expect that the results of any
such lawsuits will have a significant adverse effect on the financial condition,
results of operations or cash flows of the Company. All contingencies including
unasserted claims or assessments, which are probable and the amount of loss can
be reasonably estimated, are accrued in accordance with SFAS No. 5, Accounting
for Contingencies.
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.
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
24
Management, Inc. As a part of the 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 15, 2003, the Company was not aware of any matters that would
give rise to a material claim under any warranty or indemnity.
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 2002.
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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 2001 and 2002:
CALENDAR PERIOD HIGH LOW
- --------------- ---- ---
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
2002
First Quarter............................... $11.65 $10.08
Second Quarter.............................. $11.31 $ 9.35
Third Quarter............................... $ 9.54 $ 7.45
Fourth Quarter.............................. $ 8.00 $ 5.45
The closing sales price for Insignia's common stock on February 28, 2003,
as reported on the New York Stock Exchange, was $10.91. The Company's transfer
agent is Wachovia Bank, N.A., 1525 West W. T. Harris Boulevard, Suite 3C3,
Charlotte, North Carolina 28288. As of February 28, 2003, there were
approximately 1,460 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. The payment of
dividends is subject to certain restrictions under the Company's credit
facilities.
Convertible Preferred Stock
Insignia has 375,000 shares, or $37.5 million, of convertible preferred
stock outstanding to investment funds affiliated with Blackacre Capital
Management. The convertible preferred stock includes 250,000 shares, or $25.0
million, of Series A, initially purchased in February 2000, and 125,000 shares,
or $12.5 million, of Series B purchased in June 2002. The initial preferred
originally carried a 4% annual dividend and was exchanged in June 2002 for
Series A convertible preferred stock. The convertible preferred stock carries an
8.5% annual dividend (totaling approximately $3.2 million), payable quarterly at
Insignia's option in cash or in kind. The Company paid cash dividends of
approximately $1.8 million in 2002.
The convertible preferred stock has a perpetual term, although Insignia may
call the preferred stock, at stated value, after June 7, 2005. Upon the
dissolution, liquidation or winding up of the Company, the holders of Series A
and Series B convertible preferred stock are entitled to receive the stated
value of $100.00 per share plus accrued and unpaid dividends. The convertible
preferred issuances were exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4 (2) thereof.
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 2002, 111,840 shares of common stock
were sold under this plan at an average price of approximately $8.08 per share.
26
Stock Repurchases
At December 31, 2002, 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.
In July 2002, the Company authorized a stock repurchase program of up to
$5.0 million, subject to compliance with all covenants contained within the
Company's existing debt agreements. As of February 28, 2003, the Company had not
initiated any stock repurchases under this authorization.
Equity Compensation Plan Information
The following table sets forth information for the Company's equity
compensation plans in effect as of December 31, 2002, indicating those plans
approved by shareholders and those that have not been submitted to shareholders
for approval. All outstanding options, warrants and unvested restricted stock
under these plans are exercisable into the Company's