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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
---------------------
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 9, 2002, the Registrant had 23,195,703 shares of common stock
outstanding.
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INSIGNIA FINANCIAL GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
-----------------
INDEX
-----------------
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements 2
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and 2001 ......................... 2-3
Condensed Consolidated Balance Sheets
at June 30, 2002 and December 31, 2001.................................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001........................... 5
Notes to Condensed Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 22
Item 3. Quantitative and Qualitative Disclosure of Market Risk.................... 42
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 43
Item 4. Submission of Matters to a vote of Security Holders....................... 43
Item 6. Exhibits and Reports on Form 8-K.......................................... 44
SIGNATURES .............................................................................. 45
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INSIGNIA FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Real estate services $ 178,274 $ 170,262 $ 326,268 $ 345,359
Property operations 2,176 1,065 4,550 2,469
--------- --------- --------- ---------
180,450 171,327 330,818 347,828
--------- --------- --------- ---------
COSTS AND EXPENSES
Real estate services 161,961 155,342 301,574 311,971
Property operations 1,800 348 3,165 713
Administrative 3,801 2,982 6,583 6,382
Depreciation 4,248 3,805 8,541 7,284
Property depreciation 567 146 1,058 494
Amortization of intangibles 1,388 6,392 3,109 12,651
--------- --------- --------- ---------
173,765 169,015 324,030 339,495
--------- --------- --------- ---------
Operating income 6,685 2,312 6,788 8,333
OTHER INCOME AND EXPENSES:
Losses from Internet investments -- (2,639) -- (7,091)
Interest income 1,021 979 2,084 2,830
Interest expense (2,147) (3,743) (4,349) (6,623)
Property interest expense (390) (349) (951) (1,172)
Foreign currency transaction (losses) gains (3) 282 13 339
Equity earnings in real estate ventures 534 630 1,446 1,054
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes 5,700 (2,528) 5,031 (2,330)
Income tax (expense) benefit (2,525) 781 (2,264) 799
--------- --------- --------- ---------
Income (loss) from continuing operations 3,175 (1,747) 2,767 (1,531)
Discontinued operations:
Income (loss) from discontinued operation,
net of applicable taxes -- 302 -- (2,448)
Adjustment to loss on disposal, net of applicable taxes -- -- 265 --
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in accounting
principle 3,175 (1,445) 3,032 (3,979)
Cumulative effect of a change in accounting principle, net of
applicable tax benefit -- -- (20,635) --
--------- --------- --------- ---------
Net income (loss) 3,175 (1,445) (17,603) (3,979)
Preferred stock dividends (323) (250) (573) (500)
--------- --------- --------- ---------
Net income (loss) available to common shareholders $ 2,852 $ (1,695) $ (18,176) $ (4,479)
========= ========= ========= =========
2
INSIGNIA FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
PER SHARE AMOUNTS: Earnings per common share - basic:
Income (loss) from continuing operations $ 0.12 $ (0.09) $ 0.10 $ (0.09)
----------------------------------------------------
Income (loss) from discontinued operations -- 0.01 0.01 (0.12)
----------------------------------------------------
Cumulative effect of a change in accounting principle -- -- (0.90) --
----------------------------------------------------
Net income (loss) $ 0.12 $ (0.08) $ (0.79) $ (0.21)
====================================================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
---------- ---------- ---------- ----------
PER SHARE AMOUNTS:
Earnings per common share -diluted:
Income (loss) from continuing operations $ 0.12 $ (0.09) $ 0.09 $ (0.09)
----------------------------------------------------
Income (loss) from discontinued operations -- 0.01 0.01 (0.12)
----------------------------------------------------
Cumulative effect of a change in accounting principle -- -- (0.86) --
----------------------------------------------------
Net income (loss) $ 0.12 $ (0.08) $ (0.76) $ (0.21)
----------------------------------------------------
Weighted average common shares outstanding and assumed conversions:
- Basic 23,142 21,890 23,023 21,789
====================================================
- Assuming dilution 23,963 21,890 23,923 21,789
====================================================
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
INSIGNIA FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, DECEMBER 31,
2002 2001
---- ----
(Unaudited) (Note)
ASSETS
Cash and cash equivalents $ 82,605 $ 131,860
Receivables 141,407 176,120
Restricted cash 20,321 21,617
Property and equipment, net 56,829 62,198
Real estate investments 108,680 95,710
Goodwill, less accumulated amortization of $57,992 at December 31, 2001 279,362 288,353
Acquired intangible assets, less accumulated amortization of $62,860 and
$57,145 at June 30, 2002 and December 31, 2001, respectively 19,398 21,462
Deferred taxes 42,199 43,132
Other assets 23,413 20,069
Assets of discontinued operation -- 57,822
------------ ------------
Total assets $ 774,214 $ 918,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 10,005 $ 12,876
Commissions payable 53,136 86,387
Accrued incentives 21,244 63,911
Accrued and sundry liabilities 88,867 100,863
Deferred taxes 9,908 12,636
Notes payable 134,179 169,972
Real estate mortgage notes payable 54,241 37,269
Liabilities of discontinued operation -- 34,572
------------ ------------
Total liabilities 371,580 518,486
Stockholders' Equity:
Common stock, par value $.01 per share - authorized 80,000,000 shares,
23,169,503 (2002) and 22,852,034 (2001) issued and outstanding shares, net
of 1,502,600 (2002 and 2001) shares held in treasury 232 229
Preferred stock, par value $.01 per share - authorized 20,000,000 shares,
Series A, 250,000 (2002), Series B, 125,000 (2002) and 250,000 (2001)
issued and outstanding shares 4 3
Additional paid-in capital 436,843 422,309
Notes receivable for common stock (1,263) (1,882)
Accumulated deficit (30,148) (11,912)
Accumulated other comprehensive loss (3,034) (8,890)
------------ ------------
Total stockholders' equity 402,634 399,857
------------ ------------
Total liabilities and stockholders' equity $ 774,214 $ 918,343
============ ============
NOTE: The Balance Sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by accounting principles generally
accepted in the United States (GAAP) for complete financial statements.
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
INSIGNIA FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------
2002 2001
---- ----
OPERATING ACTIVITIES
Income (loss) from continuing operations $ 2,767 $ (1,531)
Adjustments to reconcile income (loss) from continuing operations to net cash
used in operating activities:
Depreciation and amortization 12,708 20,428
Equity earnings in real estate ventures (1,446) (1,054)
Foreign currency transaction gains (13) (339)
Losses from Internet investments -- 7,091
Changes in operating assets and liabilities:
Accounts receivable 36,229 28,052
Other assets (1,530) (5,813)
Accrued incentives (42,908) (61,613)
Accounts payable and accrued expenses (21,576) (20,734)
Commissions payable (34,396) (21,749)
-------------- --------------
Net cash used in operating activities (50,165) (57,262)
-------------- --------------
INVESTING ACTIVITIES
Payments made for acquisition of businesses (6,155) (7,283)
Proceeds from sale of real estate 24,287 40,240
Proceeds from sale of discontinued operation 23,250 --
Investment in Internet-based businesses -- (3,085)
Investment in real estate (4,897) (7,215)
Distributions from real estate investments 6,653 4,000
Additions to property and equipment, net (2,841) (6,740)
Increase (decrease) in restricted cash 2,941 (19,454)
-------------- --------------
Net cash provided by investing activities 43,238 463
-------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 547 953
Proceeds from issuance of preferred stock, net 12,325 --
Proceeds from exercise of stock options 580 1,657
Preferred stock dividends (633) (750)
Proceeds from notes payable -- 143,999
Payment on notes payable (36,722) (134,264)
Payments on real estate mortgage notes payable (20,915) (33,143)
Debt issuance costs (866) (2,130)
Proceeds from real estate mortgage notes payable -- 569
-------------- --------------
Net cash used in financing activities (45,684) (23,109)
-------------- --------------
Net cash provided by (used in) discontinued operation 1,715 (1,619)
Effect of exchange rate changes on cash 1,641 (1,548)
-------------- --------------
Net decrease in cash and cash equivalents (49,255) (83,075)
Cash and cash equivalents at beginning of period 131,860 124,527
============== ==============
Cash and cash equivalents at end of period $ 82,605 $ 41,452
============== ==============
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
1. Business
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 financial services with pre-eminent operations in
the United States, the United Kingdom and France as well as other operations in
continental Europe, Asia and Latin America. Insignia's principal executive
offices are located at 200 Park Avenue, New York, New York 10166, and its
telephone number is (212) 984-8033.
Insignia's real estate service businesses specialize in commercial leasing,
sales brokerage, corporate real estate consulting, property management, property
development and re-development, apartment brokerage and leasing, condominium and
cooperative apartment management, real estate-oriented financial services,
equity co-investment and other services. Insignia's primary real estate service
businesses include 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 (apartment brokerage and leasing) and Insignia
Residential Group (condominium and cooperative apartment management).
Insignia also offers commercial real estate services in other key markets
throughout continental Europe, Asia and Latin America in the following
locations: Madrid, Spain; Frankfurt, Germany; Milan, Italy; Brussels, Belgium;;
Amsterdam, the Netherlands; Tokyo, Japan; Hong Kong, Beijing and Shanghai,
China; Bangkok, Thailand; Mumbai, Hyderabad, Bangalore, Chennai and Delhi,
India; Manila, Philippines; and Mexico City, Mexico. In addition, the Company
holds 10% ownership interests in two commercial services businesses located in
Dublin, Ireland and Belfast, Northern Ireland.
In addition to traditional real estate services, Insignia deploys its own
capital, together with the capital of third party investors, in principal real
estate oriented ventures, including co-investment in existing property assets,
real estate development and managed private investment funds. The Company's real
estate service operations and real estate principal investment activities are
more fully described below.
2. Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
3. Reclassifications
Certain amounts for the prior year have been reclassified to conform to the
2002 presentation. These reclassifications have no effect on net income.
4. Discontinued Operations
In late December 2001, Insignia entered into a contract to sell its Realty
One single-family home brokerage business and affiliated companies to Real
Living, Inc., effective as of December 31, 2001. Real Living, Inc. is a
privately held company formed by HER Realtors of Columbus, Ohio and Huff Realty
of Cincinnati, Ohio. The sale 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 payments aggregating as much as $4 million. These additional
payments 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 million payable over the next two years (depending on
the performance of the Realty One business); and (iii) a $1 million operating
lease payable over four years for the use of proprietary software developed
6
by Insignia for an Internet-based residential brokerage model. Remaining amounts
due Insignia under the terms of the sale of $2.9 million were included in the
Company's other assets at June 30, 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 taxes of $4
million) for the year ended December 31, 2001. During the first six months of
2002, the Company reported net income of $265,000 (net of applicable tax of $1.8
million) in discontinued operations.
5. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. SFAS 141 replaces 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 might be impaired. Other acquired
intangible assets 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 has identified its reporting units and
has 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.
At December 31, 2001, the Company estimated goodwill impairment of between
$20.0 million and $50.0 million based on internal analyses of current industry
multiples and the carrying values of tangible and intangible assets of its
reporting units. Such internal analyses demonstrated that the value of the
Company's U.S. commercial operation significantly exceeded its carrying value
and that goodwill of the small Asian operation was impaired. These analyses also
indicated potential impairment in the Company's European operations and Insignia
Douglas Elliman. In early 2002, 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. The total impairment measured for
Insignia Douglas Elliman and the Asian operation aggregated $30.0 million before
applicable taxes. As a result of this evaluation, the Company reported a $20.6
million (net of tax benefit of $9.4 million) goodwill impairment charge in
earnings, as the cumulative effect of a change in accounting principle effective
January 1, 2002, for the six months ended June 30, 2002. 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 materially different results.
Amortization of goodwill totaled approximately $4.4 million and $8.5
million, respectively, for the second quarter and first half of 2001.
Elimination of this amortization would have improved income by approximately
$3.0 million and $5.9 million (net of applicable taxes), respectively, for those
periods of 2001. The following table provides pro forma information to reflect
the effect of adoption of SFAS No. 142 on earnings for the periods indicated.
7
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands, except per share data)
Reported income (loss) from continuing operations $ 3,175 $ (1,747) $ 2,767 $ (1,531)
Less: Preferred stock dividend (323) (250) (573) (500)
--------- --------- --------- ---------
Income (loss) from continuing operations available to
common shareholders 2,852 (1,997) 2,194 (2,031)
Add:
Goodwill amortization, net of tax benefit -- 3,035 -- 5,900
--------- --------- --------- ---------
Adjusted income from continuing operations available to
common shareholders $ 2,852 $ 1,038 $ 2,194 $ 3,869
========= ========= ========= =========
Earnings per common share - basic:
Reported income (loss) from continuing operations $ 0.12 $ (0.09) $ 0.10 $ (0.09)
Add:
Goodwill amortization, net of tax benefit -- 0.14 -- 0.27
--------- --------- --------- ---------
Adjusted income from continuing operations $ 0.12 $ 0.05 $ 0.10 $ 0.18
========= ========= ========= =========
Earnings per common share - assuming dilution:
Reported income (loss) from continuing operations $ 0.12 $ (0.09) $ 0.09 $ (0.09)
Add:
Goodwill amortization, net of tax benefit -- 0.13 -- 0.25
========= ========= ========= =========
Adjusted income from continuing operations $ 0.12 $ 0.04 $ 0.09 $ 0.16
========= ========= ========= =========
The Company incurred additional contingent purchase price of acquired
businesses totaling $12.6 million in the first half of 2002, which was recorded
as additional goodwill. Such additional purchase price consisted of the
following: (i) Insignia Bourdais earnout payment of $6.0 million (paid by
issuance of 131,480 shares of Insignia common stock and cash of $4.7 million);
(ii) accrual of a $4.0 million earnout for the prior Boston acquisition by
Insignia/ESG; (iii) accrual of a $2 million earnout related to Insignia Douglas
Elliman; and (iiii) payment of a $578,000 earnout related to the Company's
operations in the Netherlands. The table below reconciles the change in the
carrying amount of goodwill, by operating segment, for the period from December
31, 2001 to June 30, 2002.
GOODWILL COMMERCIAL RESIDENTIAL TOTAL
------------------ ------------------- -------------------
(In thousands)
BALANCE AS OF DECEMBER 31, 2001 $ 228,967 $ 59,386 $ 288,353
Additional purchase consideration 10,568 2,000 12,568
Reclassifications from other intangibles 287 -- 287
Goodwill related to sale of business unit -- (447) (447)
Goodwill impairment (3,201) (26,822) (30,023)
Foreign currency translation 8,624 -- 8,624
------------------ ------------------- -------------------
BALANCE AS OF JUNE 30, 2002 $ 245,245 $ 34,117 $ 279,362
================== =================== ===================
8
The following tables present certain information on the Company's acquired
intangible assets as of June 30, 2002 and December 31, 2001, respectively.
WEIGHTED
AVERAGE GROSS
AMORTIZATION CARRYING ACCUMULATED
ACQUIRED INTANGIBLE ASSETS PERIOD AMOUNT AMORTIZATION NET BALANCE
- -------------------------- -------------------------------------------------------------------
(In thousands)
AS OF JUNE 30, 2002
Property management contracts 7 years $ 72,805 $ 58,691 $ 14,114
Favorable premises leases 8 years 4,699 1,378 3,321
Other 3 years 4,754 2,791 1,963
--------------------------------------------------
Total $ 82,258 $ 62,860 $ 19,398
==================================================
AS OF DECEMBER 31, 2001
Property management contracts 7 years $ 70,926 $ 54,049 $ 16,877
Favorable premises leases 8 years 4,453 1,099 3,354
Other 3 years 3,228 1,997 1,231
--------------------------------------------------
Total $ 78,607 $ 57,145 $ 21,462
==================================================
All intangible assets are being amortized over their estimated useful lives
with no residual value. Intangibles included in "Other" consist of customer
backlog, non-compete agreements, franchise agreements and trade names. The
aggregate acquired intangible amortization expense for the six months ended June
30, 2002 and 2001 totaled $3.5 million and $4.1 million, respectively.
Intangible assets acquired in the Insignia Bourdais transaction contributed
$742,000 of amortization expense ($548,000 pertaining to customer backlog)
during the first half of 2002. This increase was offset by declines in
amortization in 2002 attributed to property management contracts that fully
amortized in 2001. Amortization of favorable premises leases, totaling
approximately $353,000 and $212,500 for the six month periods ending June 30,
2002 and 2001, respectively, is included in rental expense (included in real
estate services expenses) in the Company's statements of operations.
The estimated acquired intangible amortization expense, including amounts
reflected in rental expense, for the fiscal year ending December 31, 2002 and
for the subsequent four fiscal years ending December 31, 2006 approximates $5.7
million, $2.8 million, $1.9 million, $1.3 million and $1.3 million,
respectively.
6. Real Estate Investments
The Company engages 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 through co-investments with various clients; and (iii)
minority ownership in and management of private investment funds, whose
investments primarily consist of securitized real estate debt. As of June
30, 2002, the Company's real estate investments were $108.7 million, including
$54.4 million of carrying value of real estate attributed to three consolidated
properties. Insignia's equity investment in the consolidated properties totaled
$2.9 million at June 30, 2002.
Insignia provides incentives to certain employees, including executive
officers, through the participation, either through grants of either equity
interests (at the time investments are made) or contractual rights to proceeds,
in its real estate investments. Such grants generally consist of an aggregate
of 50% of proceeds after Insignia has recovered its investment plus a 10% per
annum return thereon. In addition, the Company generally makes discretionary
incentive payments, at the time of disposition, to certain employees of a
further 5% to 10% of proceeds in successful investments. The Company's senior
management does not participate in such additional discretionary incentive
payments. With respect to private investment funds, employees are collectively
entitled to share 55% to 60% of proceeds received by Insignia in respect of its
promoted profits interests in those funds. Employees do not share in any of
Insignia's earnings on its actual investment (before promoted interests). Gains
on sales of real estate and equity earnings for the six-month periods of 2002
and 2001 are recorded net of employee entitlements of $2.5 million and $695,000,
respectively, pursuant to these grants. The Company's principal investment
programs are more fully described below.
9
Co-investment
The Company co-invests in the purchase of operating real estate assets
including office, retail, industrial, apartment and hotel properties. As of June
30, 2002, Insignia held investments totaling $27.2 million in 34 minority owned
property assets. These properties own over 9.5 million square feet of commercial
property, 952 multi-family apartment units and 877 hotel rooms. The gross
aggregate asset carrying value of these properties totaled approximately $1
billion at June 30, 2002. The Company's minority ownership interests in
co-investment property range from 1% to 30%. Gains realized from sales of real
estate by minority owned ventures totaled $649,000 in the second quarter of 2002
and $1.6 million for the first half of 2002, compared to $464,000 for the second
quarter and first half of 2001. The gains in 2002 were attributed to the second
quarter sale of 25% owned office building in California and first quarter sale
of a 10% owned office/retail property also located in California. In 2001, the
gain resulted from the sale of a 25% owned office building also located in
California.
Insignia also consolidates three properties, two of which are wholly owned
retail properties and the third of which is an apartment complex owned by a
limited partnership in which the Company owns a 1% controlling general partner
interest. Insignia is also entitled to approximately 45% of all distributions
after limited partner return of capital. In aggregate, these three properties
comprise approximately 300,000 square feet of commercial property and 420
multi-family apartment units. At June 30, 2002, the carrying amounts of net
assets of these three properties totaled $57.1 million, and real estate mortgage
debt encumbering the properties totaled $54.2 million. The mortgages are
non-recourse to Insignia, and the Company has no further obligations to the
properties or their creditors.
The consolidated apartment complex is owned by several multi-tiered
partnerships, in which Insignia has several different interests. Since 1999,
Insignia has held a 1% general partner interest in the limited partnership that
owns the property and a 1% general partner interest in the second tier limited
partnership that owns the 99% limited partner interest in the property-owning
partnership. In the first quarter of 2002, Insignia's intent with respect to its
ownership interests in the property changed from a passive role, in which its
primary objective was to retain the property management assignment for the
property, to an active role, in which it commenced an effort to refinance all of
the debt encumbering the property. Although Insignia's economic interest in the
property is nominal (until the limited partners have received a return of all of
their 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) generally accepted accounting principles require consolidation on the basis
of voting control (regardless of the level of equity ownership). This property
had total real estate carrying value of $37.3 million and related debt of $38.3
million and is included in Insignia's consolidated balance sheet and statement
of operations at June 30, 2002. In July 2002, Insignia invested $1.2 million in
the second tier limited partnership pursuant to a $1.5 million equity financing,
with the balance invested by existing limited partners of the partnership.
Development
Insignia has an ownership interest in, and directs the development of, four
office developments. The Company also owns a parcel of land, located adjacent to
one of the developments, that is held for future development. The four
development properties have investment partners, with Insignia's ownership in
each ranging from 25% to 33%. The Company's obligations with respect to
development assets, beyond its investment, is limited to $8.9 million in partial
construction financing guarantees. The Company's investment in development
assets totaled $13.1 million at June 30, 2002. The operating status of the four
existing development projects at June 30, 2002 was as follows:
o Dallas office project - 95% leased
o Portland flex development - 60% leased
o Denver office project - 45% leased
o Portland downtown office project - Not yet leased
In July 2002, an 85% owned subsidiary of the Company acquired a mixed-use
development parcel. The purchase was funded with $18.5 million paid in cash at
closing and borrowings of $20.0 million by the property subsidiary against a
$40.0 million non-recourse loan facility provided by Lehman Brothers Holdings
LLC. The remaining availability under the loan will be utilized in future
development activities of the property. The Lehman facility is secured solely by
assets of the acquiring property subsidiary and non-recourse to other assets of
Insignia, subject only to specific recourse provisions which are standard in
real estate financings (including matters such as the misapplication of rents or
environmental liabilities).
10
Private Investment Funds
At June 30, 2002, Insignia had invested approximately $11.0 million in two
private investment funds, Insignia Opportunity Trust ("IOT") and Insignia
Opportunity Partners II ("IOP II"), and had advanced a further $3 million to IOP
II which was repaid in August 2002. In addition, at June 30, 2002, the Company
had a commitment to invest an additional $4.0 million in IOP II, of which
approximately $1.7 million was called and $1.5 million funded in July 2002.
Insignia is the sponsor and general partner of these funds, the investment
objectives of both of which are to invest primarily in secured real estate debt
securities with a focus on below investment grade commercial mortgage-backed
securities. The gross carrying value of assets owned and managed by these two
funds totaled approximately $104.0 million as of June 30, 2002.
IOT has now commenced its liquidation phase, while IOP II commenced
investment activities in December 2001 and has called $27.0 million of the $50
million total capital commitment from all partners, including $16.5 million
called in July and August 2002. Three executive officers of the Company,
including its Chief Executive Officer and Chief Operating Officer, have
committed $2.25 million, or 4.5%, of the capital to IOP II on the same basis as
all other investors. Insignia holds ownership interests of approximately 13% in
IOT and 10% in IOP II and is entitled to profits interests of 10% in IOT and 5%
in IOP II. Insignia's profits interests could increase to 30% in IOT and 50% in
IOP II, depending on the performance of the funds.
Insignia realized earnings from the two investment funds of approximately
$1.8 million and $1.3 million (after employee participation payments of $828,000
and $675,000) for the first half of 2002 and 2001, respectively. The 2002
earnings were enhanced by the pre-payment of principal on certain
mortgage-backed securities held in the investment portfolios of the two funds.
Proceeds from such pre-payments contributed approximately $353,000 to Insignia,
net of payments to employees.
7. Acquisitions
Groupe Bourdais
In late December 2001, Insignia completed the acquisition of Groupe
Bourdais, one of France's premier commercial real estate services companies.
Groupe Bourdais now operates under the Insignia Bourdais name. Founded in 1954,
Paris-based Insignia Bourdais has a total staff of 350 and operates eight
offices, including five in the Ile de France region (Greater Paris) and regional
offices in Lyon, Aix-en-Provence and Marseille. Insignia Bourdais also has
strategic affiliations and franchise agreements with local companies in 20
markets throughout France.
The Insignia Bourdais purchase price consists of total potential
consideration of approximately $49.0 million, including an initial payment of
approximately $21.4 million in cash and stock (402,645 common shares) and
additional payments totaling up to approximately $28.0 million over the three
years ending December 31, 2004, depending on the performance of the Insignia
Bourdais operation. The Company recorded contingent consideration of $6.0
million to goodwill in 2002 on the basis of the performance of Insignia Bourdais
for its fiscal year ended March 31, 2002. The additional consideration was paid
by issuance of 131,480 shares of Insignia common stock and cash of $4.7 million.
The acquisition consisted substantially of specifically identified intangible
assets and goodwill and has been allocated based upon estimates of value for
such acquired intangibles. Identified intangible assets, which included customer
backlog, property management contracts, a non-compete agreement, franchise
agreements and a favorable premises lease have subjective values and such assets
rarely if ever are transferred for value apart from the sale of the entire
business. The values ascribed to such intangibles have been based on third party
appraisals. The results of Insignia Bourdais have been included in the Company's
financial statements since January 1, 2002.
11
Other Information
The following table provides pro forma results of operations for the
periods indicated, assuming consummation of the Groupe Bourdais acquisition as
of January 1, 2001:
THREE MONTHS SIX MONTHS
(In thousands, except per share data) ENDED ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- -------------
Revenues $ 179,230 $ 367,051
==================== ===================
Loss from continuing operations (1,586) (579)
==================== ===================
Net loss (1,284) (3,027)
==================== ===================
Net loss per common share:
- Basic $ (0.07) $ (0.16)
==================== ===================
- Assuming dilution $ (0.07) $ (0.16)
==================== ===================
Pro forma results of operations for Baker Commercial and Brooke
International - India, each acquired in 2001, are not provided because the
impact of these acquisitions on the Company's results of operations was not
material.
8. Private Financing
On June 19, 2002, Insignia executed agreements for $50.0 million of new
capital through a private investment by funds affiliated with Blackacre Capital
Management, LLC. The investment consists of $12.5 million for 125,000 newly
issued shares of convertible preferred stock with a stated value of $100.00 per
share 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 million of
convertible preferred stock, which has now been exchanged for a new series of
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. Insignia may borrow in as many as
three tranches over the 18 month period ending in December 2003. The
subordinated debt matures in June 2009. In July 2002, Insignia borrowed $15.0
million under the credit facility. The proceeds were used to finance the $18.5
million investment in a development property described in Note 6 above.
12
9. Earnings Per Share
The following table sets forth the computation of the numerator and
denominator used to compute, basic and diluted earnings from continuing
operations per common share for the periods indicated. The potential dilutive
shares from the conversion of preferred stock and the exercise of options,
warrants and restricted stock is not assumed for the 2001 periods because the
inclusion of such shares would be antidilutive.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
NUMERATOR:
Numerator for basic earnings per share:
Income (loss) from continuing operations $ 3,175 $ (1,747) $ 2,767 $ (1,531)
Preferred stock dividends (323) (250) (573) (500)
------------- ------------ ------------- -------------
Income (loss) from continuing operations available to common
stockholders 2,852 (1,997) 2,194 (2,031)
Effect of dilutive securities:
Preferred stock dividends - - - -
------------- ------------ ------------- -------------
Numerator for diluted earnings per share - Income (loss) from
continuing operations available to common stockholders after
assumed conversions $ 2,852 $ (1,997) $ 2,194 $ (2,031)
============= ============ ============= =============
DENOMINATOR:
Denominator for basic earnings per share - weighted average
common shares 23,142 21,890 23,023 21,789
Effect of dilutive securities:
Stock options, warrants and unvested restricted stock 821 - 900 -
Convertible preferred stock - - - -
------------- ------------ ------------- -------------
Denominator for diluted earnings per share - weighted
average common shares and assumed conversions 23,963 21,890 23,923 21,789
============= ============ ============= =============
13
10. Comprehensive Income (Loss)
Total comprehensive income (loss) for the three and six months ended June
30, 2002 totaled income of $10.4 million and loss of $11.7 million,
respectively. For the comparable 2001 periods, total comprehensive losses were
$1.8 million and $7.4 million, respectively. The following tables set forth the
components of accumulated other comprehensive income (loss) for the periods
indicated:
ACCUMULATED
MINIMUM UNREALIZED OTHER
PENSION FOREIGN CURRENCY GAINS ON COMPREHENSIVE
SIX MONTHS ENDED - JUNE 30, 2002 LIABILITY TRANSLATION SECURITIES INCOME (LOSS)
---------------------------------------------------------------
(In thousands)
Balance - December 31, 2001 $ (900) $ (8,040) $ 50 $ (8,890)
Comprehensive (loss) income (90) 10,619 (7) 10,522
Reclassification adjustment for realized gain - - (82) (82)
Income tax benefit (provision) 29 (4,652) 39 (4,584)
---------------------------------------------------------------
(61) 5,967 (50) 5,856
---------------------------------------------------------------
BALANCE - JUNE 30, 2002 $ (961) $ (2,073) $ - $ (3,034)
===============================================================
SIX MONTHS ENDED - JUNE 30, 2001
Balance - December 31, 2000 $ $ (6,007) $ 43 $ (5,964)
-
Comprehensive (loss) income - (6,067) 104 (5,963)
Income tax benefit (provision) - 2,574 (43) 2,531
---------------------------------------------------------------
- (3,493) 61 (3,432)
---------------------------------------------------------------
Balance - June 30, 2001 $ - $ (9,500) $ 104 $ (9,396)
===============================================================
11. Industry Segment Data
Insignia's operating activities encompass two reportable segments that
include (i) commercial real estate services including principal investment
activities; and (ii) residential real estate services. The Company's reportable
segments are business units that offer similar products and services and are
managed separately because of the distinction between such services. The
accounting policies of the reportable 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. The commercial
segment also includes the Company's principal real estate investment activities.
Insignia's commercial segment in 2002 comprises 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. The operating impact of Internet initiatives for the first
half of 2001 was limited solely to $7.1 million of write-downs on equity
Internet investments made predominantly in 1999 and 2000.
14
The following tables summarize financial information by industry segment
for the periods indicated. In addition to financial measures defined by GAAP,
Insignia management monitors and evaluates its financial performance using a
primary supplemental measure. The primary measure, Net EBITDA, is defined as
income from continuing operations before depreciation, amortization, property
dispositions, Internet investment results and income taxes. This measure deducts
all interest expense and includes Funds From Operations ("FFO") from real estate
investments, which is defined as income or loss from real estate operations
before depreciation, gains or losses on sales of property and provisions for
impairment. Net EBITDA and Real estate FFO are measures that are not defined by
GAAP and Insignia's usage of these terms may differ from other companies' usage
of the same or similar terms. This financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 2 of this Form 10-Q.
COMMERCIAL RESIDENTIAL OTHER TOTAL
------------------------------------------------
(In thousands)
THREE MONTHS ENDED - JUNE 30, 2002
- ----------------------------------
REVENUES:
Real estate services $ 136,518 $ 41,756 $ -- $ 178,274
Property operations 2,176 -- -- 2,176
------------------------------------------------
TOTAL REVENUES 138,694 41,756 -- 180,450
------------------------------------------------
OPERATING INCOME (LOSS) 6,218 4,290 (3,823) 6,685
OTHER INCOME AND EXPENSE:
Interest income 644 1 376 1,021
Interest expense (128) (6) (2,013) (2,147)
Property interest expense (390) -- -- (390)
Foreign currency transaction (losses) gains (27) -- 24 (3)
Equity earnings in real estate ventures 534 -- -- 534
------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 6,851 $ 4,285 $ (5,436) $ 5,700
================================================
SIX MONTHS ENDED - JUNE 30, 2002
- --------------------------------
REVENUES:
Real estate services $ 257,259 $ 69,009 $ -- $ 326,268
Property operations 4,550 -- -- 4,550
------------------------------------------------
TOTAL REVENUES 261,809 69,009 -- 330,818
------------------------------------------------
OPERATING INCOME (LOSS) 8,192 5,224 (6,628) 6,788
OTHER INCOME AND EXPENSE:
Interest income 1,185 3 896 2,084
Interest expense (294) (11) (4,044) (4,349)
Property interest expense (951) -- -- (951)
Foreign currency transaction (losses) gains (34) -- 47 13
Equity earnings in real estate ventures 1,446 -- -- 1,446
------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 9,544 $ 5,216 $ (9,729) $ 5,031
================================================
Total assets $ 643,024 $ 64,032 $ 67,158 $ 774,214
Real estate investments 108,680 -- -- 108,680
15
INTERNET
COMMERCIAL RESIDENTIAL INITIATIVES OTHER TOTAL
------------------------------------------------------------------------------
(In thousands)
THREE MONTHS ENDED - JUNE 30, 2001
- ----------------------------------
REVENUES:
Real estate services $ 138,770 $ 31,492 $ -- $ -- $ 170,262
Property operations 1,065 -- -- -- 1,065
------------------------------------------------------------------------------
TOTAL REVENUES 139,835 31,492 -- -- 171,327
------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 5,144 169 -- (3,001) 2,312
OTHER INCOME AND EXPENSE:
Losses from Internet investments -- -- (2,639) -- (2,639)
Interest and other income 316 -- -- 663 979
Interest expense (150) (3) -- (3,590) (3,743)
Property interest expense (349) -- -- -- (349)
Foreign currency transaction gains -- -- -- 282 282
Equity earnings in real estate ventures 630 -- -- -- 630
------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 5,591 $ 166 $ (2,639) $ (5,646) $ (2,528)
=============================================================================
SIX MONTHS ENDED - JUNE 30, 2001
- --------------------------------
REVENUES:
Real estate services $ 284,437 $ 60,922 $ -- $ -- $ 345,359
Property operations 2,469 -- -- -- 2,469
------------------------------------------------------------------------------
TOTAL REVENUES 286,906 60,922 -- -- 347,828
------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 14,514 237 -- (6,418) 8,333
OTHER INCOME AND EXPENSE:
Losses from Internet investments -- -- (7,091) -- (7,091)
Interest and other income 1,100 -- -- 1,730 2,830
Interest expense (311) (21) -- (6,291) (6,623)
Property interest expense (1,172) -- -- -- (1,172)
Foreign currency transaction gains -- -- -- 339 339
Equity earnings in real estate ventures 1,054 -- -- -- 1,054
------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 15,185 $ 216 $ (7,091) $ (10,640) $ (2,330)
=============================================================================
Total assets $ 564,936 $ 174,151 $ 6,401 $ 40,831 $ 786,319
Real estate investments 69,477 -- -- -- 69,477
16
Certain geographic information is as follows:
SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
---------------------------------------------------------------
TOTAL LONG-LIVED TOTAL LONG-LIVED
REVENUES ASSETS REVENUES ASSETS
---------------------------------------------------------------
(In thousands)
United States $255,207 $ 320,708 $ 290,966 $ 314,917
United Kingdom 49,939 112,138 49,986 105,936
Other countries 25,672 31,423 6,876 7,721
---------------------------------------------------------------
$330,818 $ 464,269 $ 347,828 $ 428,574
===============================================================
Long-lived assets are comprised of property and equipment, real estate
investments, goodwill and acquired intangible assets.
12. Significant Accounting Policies
Revenue Recognition
The Company's real estate services revenues are generally recorded when the
related services are performed or at closing in the case of real estate sales.
Leasing commissions that are payable upon tenant occupancy, payment of rent or
other events beyond the Company's control are recognized upon the occurrence of
such events. As certain conditions to revenue recognition for leasing
commissions are outside of the Company's control and are not clearly defined,
judgment must be exercised in determining when such required events to
recognition have occurred. Revenues from tenant representation, agency leasing,
investment sales and residential brokerage, which collectively comprise a
substantial portion of Insignia's service revenues, are transactional in nature
and therefore subject to seasonality and changes in business and capital market
conditions. As a consequence, the timing of transactions and resulting revenue
recognition is difficult to predict.
Insignia's revenue from property management services is generally based
upon percentages of the revenue generated by the properties that it manages. In
conjunction with the providing of management services, the Company customarily
employs personnel (either directly or on behalf of the property owner) to
provide services solely to the properties managed. Insignia is reimbursed, by
the owners of managed properties, for all direct payroll related costs incurred
in the employment of property personnel. The aggregate amount of payroll costs
reimbursed approximates $40 million to $50 million annually. All such payroll
reimbursements are characterized in the Company's statements of operations as a
reduction of actual expenses incurred. This characterization is based on the
following factors: (i) the property owner generally has authority over hiring
practices and the approval of payroll prior to payment by the Company; (ii)
Insignia is the primary obligor with respect to the property personnel, but
bears little or no credit risk under the terms of the management contract; (iii)
reimbursement to the Company is generally completed simultaneous with payment of
payroll or soon thereafter; and (iv) the Company generally earns no margin in
the arrangement, obtaining reimbursement only for actual cost incurred.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
that management make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Estimates and assumptions
are used in the evaluation and financial reporting for, among other things, bad
debts, self-insurance liabilities, intangibles and investment valuations,
deferred taxes and pension costs. Actual results could differ from those
estimates under different assumptions or conditions.
Real Estate Investments
In addition to providing real estate services, Insignia invests in real
estate assets and real estate debt. Generally, the Company's investment strategy
involves identifying investment opportunities and investing as a minority owner
in entities formed to acquire such assets. All principal investment activities
are managed as a unit within the Company's commercial operating segment. The
Company's minority-owned investments are accounted for under the equity method
of accounting due to the Company's influence over the operational decisions made
with respect to the real estate entities. The Company's portion of earnings in
these real estate entities is reported in equity earnings in real estate
ventures in its statements of operations, including gains on sales of property
and net of impairments.
17
Conversely, income from dispositions of minority-owned development assets is
reported in real estate services revenues in the Company's statements of
operations. The Company's policy with respect to the timing of recognition of
promoted profit participation interests in its real estate investments is to
record such amounts upon collection.
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 for limited and specific guarantees aggregating $16.4
million (see discussion of Liquidity and Capital Resources in Item 2), is either
(i) non-recourse except to the real estate assets of the subject entity (subject
to carve-outs standard in such non-recourse financing, including the
misapplication of rents or environmental liabilities) or (ii) an obligation
solely of such limited liability entity and thus is non-recourse to other assets
of the Company.
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 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 undiscounted cash flows are not sufficient to
recover the assets 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.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which provides accounting guidance
for financial accounting and reporting for the impairment or disposal of
long-lived assets. Insignia early adopted SFAS No. 144 as of January 1, 2001.
SFAS No. 144 requires, in most cases, that gains/losses from dispositions of
investment properties and all earnings from such properties be reported as
"discontinued operations". SFAS No. 144 is silent with respect to treatment of
gains or losses from sales of investment property held in a joint venture. The
Company has concluded that, as a matter of policy, all gains and losses realized
from sales of minority owned property in its real estate co-investment program
constitute earnings from a continuing line of business. Therefore, operating
activity related to that investment program will continue to be classified as
income (loss) from continuing operations. However, SFAS No. 144 requires that
all gains or losses from sales of consolidated properties be reported as
discontinued operations. As a result, the Company's earnings from dispositions
of consolidated properties would be excluded from reported income from
continuing operations and included in discontinued operations.
Principles of Consolidation
Insignia's financial statements include the accounts of all majority-owned
subsidiaries and all entities over which the Company exercises voting control
over operating decisions. All significant intercompany balances and transactions
have been eliminated. Entities in which the Company owns less than the majority
interest and has substantial influence are recorded on the equity method of
accounting (net of payments to certain employees in respect of equity grants or
rights to proceeds).
In one instance, a minority-owned partnership (with additional promotional
interests in profits depending on performance) is consolidated by virtue of near
absolute control of the partnership. Since the limited partners' investment has
been fully depreciated, the assets, liabilities and operations of the
partnership are consolidated as if Insignia completely owned the asset, even
though economically Insignia only holds a small minority interest.
18
Foreign Currency Translation
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, which collectively
generate 15% to 25% of the Company's annual revenues. All currencies other than
the British pound, euro and dollar have comprised less than 1% of annual
revenues. 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 other comprehensive income, 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 statement of operations in
determining net income. For the first half of 2002, the Company's European
operations have been translated into U.S. dollars at average exchange rates of
$1.45 to the pound and $0.90 to the euro. In the first half of 2001, European
operations were translated to dollars at average exchange rates of $1.43 and
$0.89 to the pound and euro, respectively. The assets and liabilities of the
Company's European operations have been translated at exchange rates of $1.53 to
the pound and $0.99 to the euro at June 30, 2002 and were translated at exchange
rates of $1.41 to the pound and $0.85 to the euro at June 30, 2001.
13. Seasonality
Seasonal factors affecting the Company are disclosed in Item 2 of this Form
10-Q, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "Nature of Operations".
14. Loans to Officers
In March 2002, Insignia made a loan in the amount of $1.5 million to its
Chairman and Chief Executive Officer. The variable interest rate on the loan is
the same as the interest rate applicable to funds borrowed by Insignia on its
revolving credit facility, which rate was approximately 4.5% at June 30, 2002.
The loan is payable on or before March 5, 2005. Quarterly interest payments due
on the loan are deducted currently from the Chairman's base compensation. The
loan and any accrued interest thereon would be forgiven in limited
circumstances, such as a significant transaction or change of control.
In June 2001, Insignia made a loan in the amount of $1.5 million to its
President. The variable interest rate on the loan is the same as the interest
rate applicable to funds borrowed by Insignia on its revolving credit facility,
which rate was approximately 4.5% at June 30, 2002. The loan becomes due upon
the earliest of (i) voluntary termination of the President's employment with
Insignia, (ii) the termination of the President's employment with Insignia for
cause or (iii) March 15, 2006. Insignia will forgive $375,000 of the principal
amount of the loan and accrued interest thereon on March 15 of the year
following each of 2002, 2003, 2004 and 2005 to the extent that actual Net EBITDA
equals or exceeds 75% of annual budgeted Net EBITDA for any such year, as
approved by the Board of Directors. In addition, if aggregate actual Net EBITDA
for fiscal 2002, 2003, 2004 and 2005 equals or exceeds aggregate annual budgeted
EBITDA for such years, any outstanding principal amount of the loan and accrued
interest thereon, will be forgiven as of March 15, 2006.
In May 2002, Insignia made a loan in the amount of $270,000 to an Executive
Vice President of the Company. The variable interest rate on the loan is the
same as the interest rate applicable to funds borrowed by Insignia on its
revolving credit facility, which rate was approximately 4.5% at June 30, 2002.
Interest on the loan is payable to Insignia in cash on June 30 and December 31
of each year; provided, however, that until December 31, 2004 all interest
accrued and payable may, at the discretion of the employee, be added to the
outstanding principal balance of the loan instead of paid in cash. The loan is
repayable on the earlier of (i) June 30, 2005 or (ii) 30 days following a
termination of the employee's employment with Insignia for any reason. Beginning
on August 1, 2002, Insignia will withhold up to 50% of any distribution payable
to the employee, in respect of the employee's equity interest in the Company's
profits interest in Insignia Opportunity Partners, the operating partnership
subsidiary of Insignia Opportunity Trust, to be applied as a payment of accrued
interest and outstanding principal.
19
Pursuant to the Company's Supplemental Stock Purchase and Loan Program,
Insignia has loans outstanding to seven employees, including three executive
officers, of the Company. These loans were originally made in 1998 and 1999 for
the purchase of 158,663 newly issued shares of Insignia's common stock at an
average share price of approximately $12.18. The loans require principal and
interest payments, at a fixed rate of 7.5%, in 40 equal quarterly installments
ending December 31, 2009. The notes are secured by the common shares and are
nonrecourse to the employee except to the extent of 25% of the outstanding
amount. At June 30, 2002, the loans outstanding totaled $1.3 million and are
presented as a reduction of stockholders' equity in the Company's condensed
consolidated balance sheet.
15. Material Contingencies
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 Management, Inc. As a part of sale, the Company
agreed generally to indemnify the purchaser against all losses up to the
purchase price (subject to certain deductible amounts), resulting from the
following: (i) breaches by the Company of any representations, warranties or
covenants in the stock purchase agreement; (ii) pre-disposition obligations for
goods, services, taxes or indebtedness except for those assumed by Real Living,
Inc.; (iii) change of control payments made to employees of Realty One; and (iv)
any third party losses arising or related to the period prior to the
disposition. In addition, the Company provided an indemnification for losses
incurred by Wells Fargo Home Mortgage, Inc. ("Wells Fargo") and/or the purchaser
in respect of (i) mortgage loan files existing on the date of closing; (ii)
fraud in the conduct of its home mortgage business; and (iii) the failure to
follow standard industry practices in the home mortgage business. The aggregate
loss for which the Company is potentially liable to Wells Fargo is limited to
$10 million and the aggregate of any claims made by the purchaser and Wells
Fargo shall not exceed the purchase price. As of July 31, 2002, the Company was
not aware of any matters that would give rise to a material claim under these
warranties and indemnities.
Environmental
Under various federal and state environmental laws and regulations, a
current or previous owner or operator of real estate may be required to
investigate and remediate certain hazardous or toxic substances or
petroleum-product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The owner or operator of a site may be liable
under common law to third parties for damages and injuries resulting from
environmental contamination emanating from or at the site, including the
presence of asbestos containing materials. Insurance for such matters may not be
available.
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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.
16. Equity
During the six month period ended June 30, 2002, the Company had the
following changes in stockholders' equity:
a) Net loss of $17,603,000 for the six months ended June 30, 2002.
b) Issuance of 125,000 shares, or $12,500,000, of convertible preferred
stock (less $175,000 of issuance costs).
c) Exchange of 250,000 shares, or $25,000,000, of convertible preferred
stock, originally issued in February 2000, for a new series of
convertible preferred stock that carries an 8.5% annual dividend,
payable quarterly at Insignia's option in cash or in kind, and
convertible into Insignia common stock at a price of $14.00 per share.
d) Payments of $633,333 in preferred stock dividends.
e) Exercise of stock options to purchase 98,795 shares of Insignia common
stock at exercise prices ranging from $4.08 to $11.59 per share.
f) Sale of 53,864 shares of Insignia common stock, at an average price of
approximately $8.67, under the Company's Employee Stock Purchase
Program.
g) Issuance of 131,480 shares (valued at $1.3 million) of Insignia common
stock in connection with the Groupe Bourdais acquisition.
h) Issuance of 81,116 shares of Insignia common stock for vested
restricted stock awards.
i) Accrued compensation of $390,000 relating to restricted stock awards.
j) Payments of $77,000 on notes receivable for common stock. In addition,
the retired Chairman of the Company's U.K. subsidiary, Insignia Richard
Ellis and a Vice Chairman of Insignia/ESG, Inc. assigned to the
Company, for retirement, 47,786 shares of Insignia common stock with an
average market value of $11.35 per share. Such common shares were
retired in satisfaction of common stock purchase notes receivable of
$542,000
k) Other comprehensive income of $5,856,000, net of applicable taxes, for
the six months ended June 30, 2002, arising substantially from the
translation of European net assets at higher exchange rates
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview of Business
Insignia is a leading provider of international real estate and financial
services with pre-eminent operations in the United States, the United Kingdom
and France, as well as other operations in continental Europe, Asia and Latin
America. Insignia also invests its own capital alongside strategic third-party
investors in principal real estate oriented ventures, including co-investment in
existing properties, real estate development and managed private investment
funds.
Insignia's 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, real estate oriented
financial services, equity co-investment and other services. Insignia's primary
real estate service businesses include 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 (apartment brokerage and leasing) and Insignia
Residential Group (condominium and cooperative apartment management). Insignia
also offers commercial real estate services in other key markets throughout
continental Europe, Asia and Latin America in the following locations: Madrid,
Spain; Frankfurt, Germany; Milan, Italy; Brussels, Belgium; Amsterdam, the
Netherlands; Tokyo, Japan; Hong Kong, Beijing and Shanghai, China; Bangkok,
Thailand; Mumbai, Hyderabad, Bangalore, Chennai and Delhi, India; Manila,
Philippines; and Mexico City, Mexico. The Company also holds 10% ownership
interests in two commercial services businesses located in Dublin, Ireland and
Belfast, Northern Ireland.
Insignia now enjoys a position of particular strength in the New
York-London-Paris axis. Insignia's December 2001 acquisition of Insignia
Bourdais (formerly Groupe Bourdais) in France added a third key link to the
Company's global service platform, joining the New York and London axis that
anchors the Company's network of strategic business centers around the globe.
New York, London and Paris each represent world financial capitals and key
centers for international capital flows and global corporate headquarters.
Insignia also enjoys a unique position in New York, where it is one of the
preeminent service providers of real estate services in New York City through
Insignia/ESG in commercial real estate services and Insignia Douglas Elliman and
Insignia Residential Group in residential real estate services.
Insignia was recently ranked as the number one "Most Powerful Brokerage
Firms" for 2001, as published in the April 16, 2002 issue of Commercial Property
News, and the number one brokerage firm in the U.S., according to a list
published in the July 2002 issue of National Real Estate Investor. On a
worldwide basis, the Company completed commercial transactions valued at over
$45.0 billion, substantially more than any other firm that reported 2001
results. The Company's real estate services operations and real estate principal
investment activities are more fully described below.
Commercial Real Estate Services
The Company's commercial real estate services are performed through
Insignia/ESG in the United States, Insignia Richard Ellis in the United Kingdom,
Insignia Bourdais in France and other Insignia subsidiaries in continental
Europe, Asia and Latin America. The Company's commercial services operations
generated aggregate service revenues of $257.3 million in the first half of
2002, representing 79% of the Company's total service revenues for the period.
United States
All commercial real estate services in the U.S. are rendered under the
Insignia/ESG brand. Through Insignia/ESG, the Company is among the leading
providers of commercial real estate services in the U.S. with a leadership
position in the New York metropolitan area and a significant presence in other
major markets, including Washington, D.C., Philadelphia, Boston, Chicago,
Atlanta, Phoenix, Los Angeles, San Francisco, Dallas and Miami. Insignia/ESG's
U.S. commercial real estate services operation represents the Company's largest
business unit. For the first half of 2002, U.S. commercial services rendered by
Insignia/ESG generated revenues of $181.6 million, representing 56% of the
Company's total service revenues for the period.
22
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. Insignia/ESG's major corporate sales/leasing clients include JP
Morgan Chase, Lehman Brothers, The New York Times Company, Marsh & McLennan,
Empire Blue Cross Blue Shield, Deutsche Bank, Metropolitan Life Insurance, and
Credit Suisse First Boston. In addition, the Company provides property services
for approximately 280 million square feet of commercial real estate in the U.S.,
including office, industrial, retail and mixed-use properties. The Company's
clients include The Irvine Company, Metropolitan Life Insurance Co., Teachers
Insurance and Annuity Association, JP Morgan Chase, and UBS Brinson.
The Company prides itself on the consistent, high-quality delivery of its
services across geographic markets, property types and disciplines. The Company
has 56 U.S. offices, including markets in which it has affiliate relationships
with local service providers. Affiliate relationships are established in
secondary markets where Insignia wants to offer services for its multi-market
clients without owning the local operations. The Company currently has
affiliations in the Richmond, Baltimore, Pittsburgh and Seattle markets. In
addition, specialized divisions within the U.S. commercial services business
include Capital Advisors (investment sales and financing activities), Hotel
Partners (hotel/hospitality brokerage services), Multi Housing Properties (sales
and financing of multifamily properties) and the Development Group (fee-based
development and redevelopment services).
Europe
The Company's European businesses consist of commercial real estate
operations in the United Kingdom, France, Germany, Italy, Belgium, Spain,
Ireland and the Netherlands. For the first half of 2002, European operations
collectively produced service revenues of $72.9 million, accounting for 22% of
Insignia's total service revenues for the period.
The Company's U.K. subsidiary, London-based Insignia Richard Ellis, is among
the three leading commercial real estate service providers in the United
Kingdom. For 2001, Insignia Richard Ellis retained the number one position for
the second year in the highly competitive central London market for leasing and
acquisition services, according to a survey published in the March 9, 2002 issue
of Estates Gazette. During the first half of 2002, Insignia Richard Ellis
generated service revenues of approximately $49.9 million, or 15% of the
Company's total service revenues for the period.
Through Insignia Richard Ellis, the Company provides extensive coverage of
the entire United Kingdom market through full-service offices in London,
Glasgow, Birmingham, Leeds, Manchester, Liverpool and Jersey, and holds a
minority equity interest in an Irish real estate services company with offices
in the Republic of Ireland and Northern Ireland. The Company's U.K. operation
provides broad-ranging real estate services, including agency leasing, tenant
representation, investment sales and financing, consulting, project management,
appraisal, zoning and other general property services. The major income
components are agency leasing, tenant representation, investment sales and
financing and valuation consulting.
Through Insignia Bourdais, headquartered in Paris, the Company operates one
of France's premier real estate service companies. Based on a 2001 survey
published by L'Immobiliere d'enterprise Magazine, Insignia Bourdais commands
approximately a 20% market share of leasing and investment activity in France,
representing a number two ranking behind only Atis Real Auguste Thouard. During
the first half of 2002, Insignia Bourdais generated service revenues of
approximately $18.1 million, or 6% of the Company's total service revenues for
the period.
Insignia Bourdais has five offices in the greater Paris region and
maintains full-service offices in the Aix-en-Provence, Lyon and Marseille
markets. In addition, Insignia Bourdais maintains affiliate relationships in 20
additional markets throughout France. Major clients in France include Siemens,
GE Capital, France Telecom, Unibail, Renault and Groupe AMA.
23
Asia and Latin America
The Company operates in Asia through 12 commercial service offices in the
following locations: Tokyo, Japan; Hong Kong; Beijing and Shanghai, China;
Bangkok, Thailand; Mumbai, Hyderabad, Bangalore, Chennai and Delhi, India; and
Manila, Philippines. The Company also has full service capabilities in Latin
America through Mexico City based Insignia/ESG de Mexico. Insignia/ESG de Mexico
serves clients throughout the major markets in Mexico and 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, acquisition advisory and due diligence services,
project coordination and supervision, real estate valuations, tenant
representation, asset management and strategic advisory services. During the
first half of 2002, the Company's start-up operations in Asian and Latin
American - launched in 2001 - generated aggregate revenues of $2.7 million.
Residential Real Estate Services
The Company's residential real estate services are focused on the New York
City marketplace through the operations of Insignia Douglas Elliman and Insignia
Residential Group. Through these businesses, the Company provides apartment
brokerage and leasing and condominium and cooperative apartment management. The
Company's residential services operations generated aggregate service revenues
of $69.0 million in the first half of 2002, or approximately 21% of the
Company's total service revenues.
New York City Apartment Sales and Rentals
Through Insignia Douglas Elliman, Insignia provides sales and rental
services in the New York City residential cooperative, condominium and rental
apartment market. 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). Insignia Douglas Elliman commands the number
two position in New York City, according to the March 11, 2002 issue of Crain's
New York Business, with gross sales volume of approximately $2.4 billion in
2001. Insignia Douglas Elliman had been ranked number one in prior years; its
decline to the number two position in 2001 is attributable solely to the
combination of three competitors - the former Brown Harris Stevens,
Halstead/Feathered Nest and Halstead Property Co. under the ownership of Terra
Holdings. During the first half of 2002, Insignia Douglas Elliman generated
service revenues of approximately $55.7 million, or 17% of the Company's total
service revenues for the period.
New York City Apartment Management
Through Insignia Residential Group, the Company operates the largest
manager of cooperative, condominium and rental apartments in the New York
metropolitan area, according to a survey in the February 2002 issue of The
Cooperator. Insignia Residential Group provides full service third-party fee
management for more than 300 properties, comprising in excess of 60,000
residential units. Among the notable properties currently managed by Insignia
Residential Group in the New York metropolitan area are Stuyvesant Town/Peter
Cooper Village, Worldwide Plaza, and Horizon House. Stuyvesant Town/Peter Cooper
Village is an 11,000-unit residential community owned by Metropolitan Life that
represents one of the single largest property services assignments in New York
City.
Manhattan is the largest market for Insignia Residential Group, although it
also maintains a presence in three other boroughs of New York City as well as
Long Island, Westchester County and Northern New Jersey. In addition to property
management, Insignia Residential Group also offers mortgage brokerage services,
including resale and financing arrangements for cooperative and condominium
corporations through third-party financial institutions. Insignia Residential
Group generated total service revenues of $13.3 million in the first half of
2002.
Real Estate Principal Investment Activities
Insignia, through Insignia Financial Services, invests in real estate
assets and real estate debt. The Company's investment strategy generally
involves identifying investment opportunities and investing as a minority owner
or, in limited instances, by itself in the purchase of qualifying assets. The
Company's investments include operating properties, property acquired for
development and managed private investment funds that invest primarily in
secured real estate debt instruments. Insignia's co-investment partners include
the following notable business entities: Citigroup, GE Investments, ING Barings,
Blackacre Capital Management, Lennar, Praedium, Lone Star Opportunity Fund,
Prudential and Whitehall Street Real Estate.
24
In addition to venture related investment returns, Insignia generates
revenues from fee-based services provided to the minority owned real estate
investment entities. Such revenues generally include property management fees,
asset management fees, development management fees, leasing commissions,
acquisition fees, sales commissions or financing fees.
RESULTS OF OPERATIONS
Insignia's second quarter of 2002 benefited from a modest improvement in
the business activity over first quarter of 2002 consistent with the Company's
typical seasonal pattern of performance. In particular, the Company's
residential apartment brokerage and leasing unit, Insignia Douglas Elliman,
produced its strongest quarter ever and European commercial services operations
improved significantly from the first quarter of 2002. The Company's residential
property management operation, Insignia Residential Group, also benefited from a
re-engineering process and turned in a strong operating performance for the
second quarter of 2002 quarter (before a $1 million charge for the estimated
costs of a lease covering office space vacated in June 2002). Payments due under
this vacated lease, which expires in January 2009, total approximately $1.3
million annually. While U.S. commercial services operations performed better in
the second quarter of 2002, as compared with the first quarter of 2002, leasing
activity in virtually all U.S. markets remained soft. As a result, financial
performance of the U.S. commercial operation in the second quarter 2002 lagged
behind the same period of 2001.
Overall, Insignia's business reflects a balance between a very strong
residential New York market and a weak worldwide environment for commercial
leasing services as corporate clients remain slow to make commitments given the
uncertainty of the economy. As a consequence, the time needed to complete
transactions has lengthened materially. Compared with the accelerated pace of
activity in the late 1990s and 2000, office leases and property investment sales
including those in our co-investment portfolio -- are now taking as much as
twice as long to consummate. This will probably cause some of the transactions
that the Company might have expected to close in 2002 to be delayed until 2003.
For the second quarter of 2002, the Company reported income from continuing
operations of $3.2 million ($0.12 per diluted share), an improvement from a loss
of $1.7 million ($0.09 per diluted share) in the second quarter of 2001. Net
income for the second quarter of 2002 totaled $3.2 million ($0.12 per diluted
share) compared to a net loss of $1.4 million for the same period of 2001.
Earnings for the second quarter of 2001 were reduced by $2.6 million of pre-tax
losses on Internet-related investments as well as goodwill amortization of $4.4
million.
For the second quarter of 2002, Net EBITDA was $12.3 million ($0.46 per
diluted share) up 10% from $11.2 million ($0.44 per diluted share) in the second
quarter of 2001. Service revenues for the second quarter of 2002 totaled $178.3
million, an increase from $170.3 million for the same period in 2001. The
increase in revenues includes an $8.1 million contribution from the Company's
French business unit, Insignia Bourdais (acquired in late December 2001) and a
$10.4 million increase at Insignia Douglas Elliman, offset by a $11.9 million
decline in Insignia/ESG.
For the first six months of 2002, income from continuing operations totaled
$2.8 million ($0.09 per diluted share), an improvement from a loss of $1.5
million ($0.09 loss per diluted share) in the first six months of 2001. The 2001
results reflect pre-tax losses on Internet investments of $7.1 million and
goodwill amortization of $8.5 million. In addition, the cumulative effect of the
required change in accounting principle for goodwill in 2002 and the results of
the discontinued Realty One operation reduced net income, with a net loss of
$17.6 million for the first half of 2002 and $4.0 million for 2001.
For the first half of 2002, Net EBITDA totaled $18.3 million ($0.69 per
diluted share), down from $26.6 million ($1.06 per diluted share) for the same
period last year. For the first half of 2002, revenues reached $326.3 million,
down from $345.4 million for the 2001 period. The first half 2001 results were
bolstered by an unusually strong first quarter, the best in the Company's
history, while this year's first quarter was much weaker than in recent years.
Earnings per share for the 2002 periods was lowered by a 9% increase in
average diluted shares from a year ago. Increases approximated 900,000 shares
for the dilutive effect of options and warrants that were non-dilutive by virtue
of reported losses in 2001, approximately 500,000 shares issued to employees in
option exercises and stock plan purchases and approximately 534,000 shares
issued in connection with the Insignia Bourdais acquisition.
Insignia management monitors and evaluates its financial performance using
two primary measures - Net EBITDA and income from continuing operations. Net
EBITDA is defined as income from continuing operations
25
before depreciation, amortization, property dispositions, Internet investment
results and income taxes. Net EBITDA deducts all interest expense and includes
Funds From Operations ("FFO") from real estate co-investments. Real estate FFO
is defined as income or loss from real estate operations before depreciation,
gains or losses on sales of property and provisions for impairment. Net EBITDA
and Real Estate FFO are supplemental measures that are not defined by GAAP and
Insignia's usage of these terms may differ from other companies' usage of the
same or similar terms.
The table below depicts the Company's operating results, in a format that
highlights the above measures, and reconciles them to GAAP net income, for the
three and six months ended June 30, 2002 and 2001, respectively. Operating
results for each period present all results related to the sold Realty One
business in discontinued operations. This information has been derived from the
Company's condensed consolidated statements of operations for the periods then
ended.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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