Back to GetFilings.com
================================================================================
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 SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to ________
---------------
Commission File Number 1-14373
INSIGNIA FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 56-2084290
(State of Incorporation) (I.R.S. Employer Identification No.)
200 PARK AVENUE, NEW YORK, NEW YORK 10166
(Address of Principal Executive Offices) (Zip Code)
(212) 984-8033
(Registrant's Telephone Number, Including Area Code)
---------------
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 October 31, 2002 the Registrant had 23,237,690 shares of common stock
outstanding.
================================================================================
INSIGNIA FINANCIAL GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
---------------
INDEX
---------------
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements 2
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001 .... 2-3
Consolidated Balance Sheets
at September 30, 2002 and December 31, 2001................ 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2002 and 2001...... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 25
Item 3. Quantitative and Qualitative Disclosure of Market Risk.... 41
Item 4. Controls and Procedures................................... 41
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings......................................... 42
Item 6. Exhibits and Reports on Form 8-K.......................... 42
SIGNATURES 43
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
INSIGNIA FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES
Real estate services $ 187,802 $ 146,306 $ 514,070 $ 491,665
Property operations 2,380 720 6,930 3,189
--------- --------- --------- ---------
190,182 147,026 521,000 494,854
--------- --------- --------- ---------
COSTS AND EXPENSES
Real estate services 169,435 140,116 471,009 452,087
Property operations 1,881 186 5,046 899
Administrative 4,502 2,399 11,085 8,781
Depreciation 4,541 3,954 13,082 11,238
Property depreciation 445 316 1,503 810
Amortization of intangibles 1,030 5,829 4,139 18,480
--------- --------- --------- ---------
181,834 152,800 505,864 492,295
--------- --------- --------- ---------
Operating income (loss) 8,348 (5,774) 15,136 2,559
OTHER INCOME AND EXPENSES:
Interest income 846 971 2,930 3,801
Other income, net 1,295 17 1,308 356
Interest expense (2,406) (3,091) (6,755) (9,714)
Property interest expense (670) (305) (1,621) (1,477)
Losses from internet investments -- (1,779) -- (8,870)
Equity earnings in real estate 70 234 1,516 1,288
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes 7,483 (9,727) 12,514 (12,057)
Income tax (expense) benefit (3,367) 4,331 (5,631) 5,130
--------- --------- --------- ---------
Income (loss) from continuing operations 4,116 (5,396) 6,883 (6,927)
Discontinued operations, net of applicable taxes:
Income (loss) from operations -- 926 -- (1,522)
Adjustment to loss on disposal 4,653 -- 4,918 --
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in accounting
principle 8,769 (4,470) 11,801 (8,449)
Cumulative effect of a change in accounting principle, net of
applicable tax benefit -- -- (20,635) --
--------- --------- --------- ---------
Net income (loss) 8,769 (4,470) (8,834) (8,449)
Preferred stock dividends (800) (250) (1,373) (750)
--------- --------- --------- ---------
Net income (loss) available to common shareholders $ 7,969 $ (4,720) $ (10,207) $ (9,199)
========= ========= ========= =========
2
INSIGNIA FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
PER SHARE AMOUNTS: Earnings per common share -- basic:
Income (loss) from continuing operations $ 0.14 $ (0.25) $ 0.24 $ (0.35)
Income (loss) from discontinued operations 0.20 0.04 0.21 (0.07)
Cumulative effect of a change in accounting principle -- -- (0.89) --
---------- ---------- ---------- ----------
Net income (loss) $ 0.34 $ (0.21) $ (0.44) $ (0.42)
========== ========== ========== ==========
Earnings per common share -- diluted:
Income (loss) from continuing operations $ 0.14 $ (0.25) $ 0.23 $ (0.35)
Income (loss) from discontinued operations 0.20 0.04 0.21 (0.07)
Cumulative effect of a change in accounting principle -- -- (0.86) --
---------- ---------- ---------- ----------
Net income (loss) $ 0.34 $ (0.21) $ (0.43) $ (0.42)
========== ========== ========== ==========
Weighted average common shares outstanding and assumed conversions:
-- Basic 23,198 22,214 23,082 21,932
========== ========== ========== ==========
-- Assuming dilution 23,593 22,214 23,869 21,932
========== ========== ========== ==========
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
3
INSIGNIA FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30 DECEMBER 31
2002 2001
------------ -----------
(Unaudited) (Note)
ASSETS
Cash and cash equivalents $ 90,041 $ 131,860
Receivables, net of allowance of $6,605 (2002) and $5,972 (2001) 155,984 176,120
Restricted cash 22,973 21,617
Property and equipment, net 57,424 62,198
Real estate investments, net 135,717 95,710
Goodwill, less accumulated amortization of $57,992 (2001) 281,277 288,353
Acquired intangible assets, less accumulated amortization of
$63,989 (2002) and $57,145 (2001) 18,184 21,462
Deferred taxes 42,202 43,132
Other assets 28,704 20,069
Assets of discontinued operation -- 57,822
--------- ---------
Total assets $ 832,506 $ 918,343
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 11,339 $ 12,876
Commissions payable 58,224 86,387
Accrued incentives 35,554 63,911
Accrued and sundry 90,236 100,863
Deferred taxes 8,185 12,636
Notes payable 149,502 169,972
Real estate mortgages 66,718 37,269
Liabilities of discontinued operation -- 34,572
--------- ---------
Total liabilities 419,758 518,486
Stockholders' Equity:
Common stock, par value $.01 per share -- authorized 80,000,000 shares,
23,203,149 (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 437,275 422,309
Notes receivable for common stock (1,227) (1,882)
Accumulated deficit (21,778) (11,912)
Accumulated other comprehensive loss (1,758) (8,890)
--------- ---------
Total stockholders' equity 412,748 399,857
--------- ---------
Total liabilities and stockholders' equity $ 832,506 $ 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 Consolidated Financial Statements.
4
INSIGNIA FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Income (loss) from continuing operations $ 6,883 $ (6,927)
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities:
Depreciation and amortization 18,724 30,528
Equity earnings in real estate ventures (1,516) (1,288)
Gain on sale of real estate property (1,306) --
Losses from internet investments -- 8,870
Changes in operating assets and liabilities:
Accounts receivable 22,329 47,081
Other assets (5,131) (11,533)
Accrued incentives (29,069) (53,894)
Accounts payable and accrued expenses (18,532) (29,081)
Commissions payable (28,345) (28,406)
--------- ---------
Net cash used in operating activities (35,963) (44,650)
--------- ---------
INVESTING ACTIVITIES
Payments made for acquisition of businesses (9,923) (10,003)
Proceeds from sale of real estate 35,287 40,240
Proceeds from sale of discontinued operation 23,250 --
Investment in internet-based businesses -- (3,795)
Investment in real estate (46,384) (7,157)
Distributions from real estate investments 14,463 4,821
Additions to property and equipment, net (7,892) (10,721)
Increase in restricted cash (127) (19,371)
--------- ---------
Net cash provided by (used in) investing activities 8,674 (5,986)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 685 1,243
Proceeds from issuance of preferred stock, net 12,270 --
Proceeds from exercise of stock options 606 2,077
Preferred stock dividends (1,032) (1,000)
Proceeds from notes payable 15,000 143,999
Payment on notes payable (36,722) (134,337)
Proceeds from real estate mortgages 20,000 513
Payments on real estate mortgages (28,438) (33,086)
Debt issuance costs (1,086) (2,130)
--------- ---------
Net cash used in financing activities (18,717) (22,721)
--------- ---------
Net cash provided by (used in) discontinued operations 1,715 (1,070)
Effect of exchange rate changes on cash 2,472 (14)
--------- ---------
Net decrease in cash and cash equivalents (41,819) (74,441)
Cash and cash equivalents at beginning of period 131,860 124,527
--------- ---------
Cash and cash equivalents at end of period $ 90,041 $ 50,086
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,489 $ 7,343
Cash paid for taxes 5,315 6,859
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
5
NOTES TO 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 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 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 (New York apartment brokerage and leasing) and
Insignia Residential Group (New York condominium, cooperative and rental
apartment management). Insignia's commercial real estate service operations in
continental Europe, Asia and Latin America include the following locations:
Madrid and Barcelona, Spain; Frankfurt, Germany; Milan and Bologna, 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 a 10% ownership interest in a commercial services business with operations
in Dublin, Ireland and Belfast, Northern Ireland.
Insignia also provides real estate services -- through an affiliate program
launched in 2001 -- in secondary markets in the U.S. and around the globe where
the Company wants to meet the needs of its multi-market clients without owning
the 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. Insignia has established U.S. affiliations with service
providers in Pittsburgh, Baltimore, Seattle and Indianapolis and foreign
affiliations in the U.K., France, Denmark, Sweden and South Africa. In France,
twenty affiliate offices were gained as part of the Groupe Bourdais acquisition.
In addition to traditional real estate services, Insignia deploys 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.
2. Interim Financial Information
The accompanying unaudited 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 nine
months ended September 30, 2002 is 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.
6
4. 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 provision 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. In most instances, Insignia
is reimbursed by the owners of managed properties for direct payroll related
costs incurred in the employment of property personnel. The aggregate amount of
payroll costs reimbursed exceeds $75 million annually. Such payroll
reimbursements are generally characterized in the Company's consolidated
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 simultaneously 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
Insignia invests in real estate and real estate related assets. Generally,
the Company's investment strategy involves identifying investment opportunities
and investing as a minority owner in entities formed to acquire such assets. The
Company's minority-owned investments are generally 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 in its consolidated statements of operations, including gains on sales of
property and net of impairments. Conversely, income from dispositions of
minority-owned development assets is reported in real estate services revenues
in the Company's consolidated 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 a real estate investment is a
special 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 $14.2 million (see discussion of Liquidity and Capital Resources in
Item 2 of this Form 10-Q), 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 are generally derived from the following services: (i) property
management, (ii) asset management, (iii) development management, (iv) investment
management, (v) leasing, (vi)
7
acquisition, (vii) sales or (viii) financings. 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 asset's 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 included in
income (loss) from continuing operations. However, SFAS No. 144 requires that
gains or losses from sales of consolidated properties, if material, 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 consolidated financial statements include the accounts of all
majority-owned subsidiaries and all entities over which the Company exercises
voting control. All significant intercompany balances and transactions have been
eliminated. Entities in which the Company owns less than a 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
general partner control. 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 Insignia
holds a minority economic interest.
Foreign Currency
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 from 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 (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. For the nine months ended
September 30, 2002, the Company's European operations have been translated into
U.S. dollars at average exchange rates of $1.49 to the pound and $0.93 to the
euro. For the nine months of 2001, European operations were translated to U.S.
dollars at average exchange rates of $1.44 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 $1.56 to the pound and $0.98 to the
euro at September 30, 2002 and were translated at exchange rates of $1.47 to the
pound and $0.91 to the euro at September 30, 2001.
8
5. 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."
6. 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 $4.0 million. The 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 by
Insignia for an Internet-based residential brokerage model. Remaining amounts
due to Insignia under the terms of the sale totaling $2.8 million were included
in other assets in the Company's consolidated balance sheet at September 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 $4.0 million) for the year ended
December 31, 2001. During the three and nine months ended September 30, 2002,
the Company reported net income of $4.7 million and $4.9 million, respectively,
from discontinued operations. The third quarter income represents the
elimination of a valuation allowance on a $4.7 million tax benefit on the
capital portion of the loss on sale of Realty One. This capital loss was 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
a tax benefit for financial reporting purposes.
7. Change in Accounting Principle
In September 2002, the Company adopted the fair value expense recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, in
accounting for employee stock options. The accounting change results 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 the first nine months of
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. For the nine months of 2002, stock compensation expense recognized
totaled $116,000.
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. 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. Insignia does not expense the value of
outstanding options issued before January 1, 2002. Information about values of
those options and the estimated effect if expensed is disclosed in the notes to
the consolidated financial statements included in the Company's 2001 Form 10-K.
9
8. Goodwill and Intangible Assets
In June 2001, the FASB issued 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.
In the first quarter of 2002, 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. 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 nine
months ended September 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 different
results.
10
Amortization of goodwill totaled approximately $4.4 million and $12.9
million, respectively, for the three and nine months ending September 30, 2001.
Elimination of this amortization would have improved income by approximately
$3.1 million and $9.0 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands, except per share data)
Reported income (loss) from continuing operations $ 4,116 $ (5,396) $ 6,883 $ (6,927)
Less: Preferred stock dividend (800) (250) (1,373) (750)
--------- --------- --------- ---------
Income (loss) from continuing operations available to
common shareholders 3,316 (5,646) 5,510 (7,677)
Add:
Goodwill amortization, net of tax benefit of $1,333 and
$3,946 for the three and nine months ending September 30,
2001 -- 3,063 -- 8,964
--------- --------- --------- ---------
Adjusted income from continuing operations available to
common shareholders $ 3,316 $ (2,583) $ 5,510 $ 1,287
========= ========= ========= =========
Earnings per common share -- basic:
Reported income (loss) from continuing operations $ 0.14 $ (0.25) $ 0.24 $ (0.35)
Add:
Goodwill amortization, net of tax benefit of $0.06 and
$0.18 for the three and nine months ending September 30,
2001 -- 0.14 -- 0.41
--------- --------- --------- ---------
Adjusted income (loss) from continuing operations $ 0.14 $ (0.11) $ 0.24 $ 0.06
========= ========= ========= =========
Earnings per common share -- assuming dilution:
Reported income (loss) from continuing operations $ 0.14 $ (0.25) $ 0.23 $ (0.35)
Add:
Goodwill amortization, net of tax benefit of $0.06 and
$0.18 for the three and nine months ending September 30,
2001 -- 0.14 -- 0.41
--------- --------- --------- ---------
Adjusted income (loss) from continuing operations $ 0.14 $ (0.11) $ 0.23 $ 0.06
========= ========= ========= =========
Additional contingent purchase price of acquired businesses totaling $12.7
million was recorded as additional goodwill during the first nine months of
2002. Such additional purchase price included: (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) a $4.0 million earnout with respect to the
prior Boston acquisition by Insignia/ESG; (iii) a $2.0 million earnout related
to Insignia Douglas Elliman; and (iv) a $728,000 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 September 30, 2002.
GOODWILL COMMERCIAL RESIDENTIAL TOTAL
- -------- ------------ ------------ ------------
(In thousands)
BALANCE AS OF DECEMBER 31, 2001 $ 228,967 $ 59,386 $ 288,353
Additional purchase consideration 10,728 2,000 12,728
Reclassifications from other intangibles 287 -- 287
Goodwill related to sale of business unit -- (447) (447)
Cumulative goodwill impairment (3,201) (26,822) (30,023)
Foreign currency translation 10,379 -- 10,379
------------ ------------ ------------
BALANCE AS OF SEPTEMBER 30, 2002 $ 247,160 $ 34,117 $ 281,277
============ ============ ============
11
The following tables present certain information on the Company's acquired
intangible assets as of September 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 SEPTEMBER 30, 2002
Property management contracts 7 years $ 72,799 $ 59,380 $ 13,419
Favorable premises leases 8 years 4,675 1,517 3,158
Other 3 years 4,699 3,091 1,608
------------ ------------ ------------
Total $ 82,173 $ 63,989 $ 18,184
============ ============ ============
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 nine months ended
September 30, 2002 and 2001 totaled $4.6 million and $5.6 million, respectively.
Intangible assets acquired in the Insignia Bourdais transaction contributed $1.1
million of amortization expense ($765,000 pertaining to customer backlog) during
the first three quarters 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 $492,000 and $319,000 for the nine month periods ending September
30, 2002 and 2001, respectively, is included in rental expense (included in real
estate services expenses) in the Company's consolidated 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 through December 31, 2006 approximates $5.7
million, $2.8 million, $1.9 million, $1.3 million and $1.3 million,
respectively.
9. 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 on its on 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. As of September
30, 2002, the Company's real estate investments totaled $135.7 million,
consisting of the following: (i) $27.8 million in minority-owned operating
properties; (ii) $82.8 million of carrying value of real estate attributed to
three consolidated properties; (iii) $10.6 million in minority owned development
properties; (iv) $1.7 million in a land parcel held for development; and (v)
$12.8 million in real estate debt investment funds. Insignia's equity investment
in the consolidated properties totaled $22.4 million at September 30, 2002.
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 the time investments are made) or contractual rights to proceeds.
Such grants generally consist of an aggregate of 50% of the cash proceeds to
Insignia after Insignia has recovered its full investment plus a 10% per annum
return thereon. In addition, upon disposition, the Company generally makes
discretionary incentive payments of 5% to 10% to certain employees who directly
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 and are not entitled to
any portion of earnings on the Company's actual investment. Gains on sales of
real estate and equity earnings for the nine-month periods of 2002 and 2001 are
recorded net of employee entitlements of $5.0
12
million and $695,000, respectively, pursuant to these grants. The Company's
principal investment programs are more fully described below.
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 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 will apply to investments made by the Company
on and after July 29, 2002. The mechanics by which this policy will be
implemented will be determined based on the collective efforts of members of the
Committee, its independent counsel and consultants and management. No grants to
such members of senior management with respect to investments made after July
29, 2002 shall be made until such mechanics are in place.
Property Investment
The Company co-invests in the purchase of operating real estate assets
including office, retail, industrial, apartment and hotel properties. As of
September 30, 2002, Insignia held equity investments totaling $27.8 million in
33 minority owned property assets. These properties consist of over 8.4 million
square feet of commercial property, 1,487 multi-family apartment units and 829
hotel rooms. The gross aggregate asset carrying value of these properties
totaled approximately $1 billion at September 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 $2.0
million in the third quarter of 2002 and $3.7 million for the first nine months
of 2002, compared to $161,000 and $625,000 for the third quarter and nine months
of 2001. Such amounts are included under the caption "equity earnings in real
estate" 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. With respect to the New York City apartment complex, Insignia
is entitled to approximately 45% of all distributions after limited partners
receive a return of all invested capital (aggregating approximately $6.0
million). These properties comprise approximately 155,000 square feet of
commercial space and 420 multi-family apartment units. At September 30, 2002,
the carrying amounts of these consolidated real estate assets totaled $45.8
million, and non-recourse real estate mortgage debt totaled $46.7 million. In
September 2002, a consolidated retail property was sold for a $1.3 million gain.
The gain is included under the caption "other income, net" in the Company's
consolidated statements of operations.
The New York City 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 has 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 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). In July 2002,
Insignia invested $1.2 million in the second tier limited partnership as a new
limited partner pursuant to a $1.5 million equity financing. The remaining
$300,000 was invested by existing limited partners in June 2002.
Development
In July 2002, a subsidiary of the Company acquired three contiguous parcels
of property and related leasehold rights in St. Thomas, United States 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 a portion of a $20.0 million
borrowing by the subsidiary under a $40.0 million mortgage loan facility. At
September 30, 2002, approximately $3.5 million of the borrowing was held in cash
and escrowed reserves. The property is currently undergoing predevelopment
activities together with operating activities of an existing marina.
13
The property and its debt are consolidated in the Company's consolidated
financial statements. The loan facility is non-recourse to Insignia. Insignia's
investment in the property totaled $19.4 million at September 30, 2002.
In addition, Insignia has minority ownership in four office projects whose
development is directed by the Company. Insignia also owns a parcel of land in
Denver, located adjacent to one of the office developments, that is held for
future development. This land parcel was subject to an impairment write-down in
the third quarter of 2002 as described in Note 10. Insignia's ownership in the
four office projects range from 25% to 33% and the operating status of each at
September 30, 2002 was as follows:
o Dallas office project -- 96% leased
o Portland flex project -- 60% leased
o Denver office project -- 41% leased
o Portland downtown office project -- 1% leased
The Company's only obligations with respect to the office developments,
beyond its investment, are partial construction financing guarantees totaling
$8.9 million. The Company's investment in development assets totaled $31.7
million at September 30, 2002. Interest capitalized in connection with these
developments totaled $663,000 and $427,000, respectively, for the nine-month
periods of 2002 and 2001.
Private Investment Funds
At September 30, 2002, Insignia had equity investments of $12.8 million in
two private investment funds, Insignia Opportunity Trust ("IOT") and Insignia
Opportunity Partners II ("IOP II") and had a commitment to invest an additional
$2.3 million in IOP II. 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
and managed by the two funds was approximately $140.0 million as of September
30, 2002.
IOT has completed its deployment of committed capital and IOP II has called
$28.5 million of its $48.5 million of total capital commitments. Three executive
officers of the Company have committed $2.25 million 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 currently entitled to an additional profits
participation of 10% in IOT and 5% in IOP II. Insignia's additional profits
participation could increase to 30% in IOT and 50% in IOP II, depending on the
performance of the funds. Insignia's earnings from its investments in IOT and
IOP II was $2.4 million and $1.7 million (after employee incentive participation
of $1.1 million and $675,000) for the nine months of 2002 and 2001,
respectively, and are included in real estate services revenues in the
accompanying consolidated statements of operations.
10. Real Estate Impairment
During the third quarter of 2002, the Company recorded impairment against
its real estate investments of $1.6 million on five property assets. Insignia
re-evaluates each real estate investment on a quarterly basis, taking into
account changes in market conditions and prospects. The impairment charge
includes $560,000 for the Denver land parcel held for future development
(disclosed in Note 9 above) based on a third party appraisal and $703,000 for a
15% owned office building, located in Boston, suffering from increased vacancies
and lowered rental rates.
11. 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. 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
14
favorable premises lease, have been valued based on third party appraisals. The
results of Insignia Bourdais have been included in the Company's financial
statements since January 1, 2002.
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30 2001 SEPTEMBER 30 2001
----------------- ------------------
(In thousands, except per share data)
Revenues $ 154,887 $ 521,938
============ ============
Loss from continuing operations (4,254) (4,833)
============ ============
Net loss (3,328) (6,355)
============ ============
Net loss per common share:
-- Basic $ (0.16) $ (0.32)
============ ============
-- Assuming dilution $ (0.16) $ (0.32)
============ ============
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.
12. 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. 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
purchase of the real estate development property described in Note 9.
15
13. Long Term Debt
SEPTEMBER 30 DECEMBER 31
2002 2001
------------- -------------
(In thousands)
NOTES PAYABLE
Senior revolving credit facility $ 117,000 $ 149,000
Subordinated credit facility 15,000 --
Acquisition loan notes 17,502 20,972
------------- -------------
149,502 169,972
------------- -------------
REAL ESTATE MORTGAGES 66,718 37,269
------------- -------------
TOTAL $ 216,220 $ 207,241
============= =============
The acquisition loan notes are payable to sellers of the acquired UK
businesses and are backed by restricted cash deposits in approximately the same
amount. The loan notes have a semiannual redemption feature at the discretion of
the note holder. The real estate mortgages are secured solely by the property
assets owned by the respective consolidated subsidiaries. Maturities range from
December 2002 to October 2023. At September 30, 2002, Insignia had over $78.0
million of availability on its credit facilities under its covenants. In October
2002, Insignia paid down $22.0 million on the senior revolving credit facility
from existing cash balances, lowering its outstanding balance to $95.0 million.
16
14. 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands)
NUMERATOR:
Numerator for basic earnings per share:
Income (loss) from continuing operations $ 4,116 $ (5,396) $ 6,883 $ (6,927)
Preferred stock dividends (800) (250) (1,373) (750)
---------- ---------- ---------- ----------
Income (loss) from continuing operations available
to common stockholders $ 3,316 $ (5,646) $ 5,510 $ (7,677)
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 $ 3,316 $ (5,646) $ 5,510 $ (7,677)
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share -- weighted average
common shares 23,198 22,214 23,082 21,932
Effect of dilutive securities:
Stock options, warrants and unvested restricted stock 395 -- 788 --
Convertible preferred stock -- -- -- --
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -- weighted
average common shares and assumed conversions 23,593 22,214 23,869 21,932
========== ========== ========== ==========
15. Comprehensive Income (Loss)
The following table presents a calculation of comprehensive income (loss)
for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands)
Net income (loss) $ 8,769 $ (4,470) $ (8,834) $ (8,449)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment 1,294 2,991 7,261 (502)
Reclassification adjustment for realized gain -- -- (50) --
Unrealized gains on securities -- (56) -- 5
Minimum pension liability (18) -- (79) --
---------- ---------- ---------- ----------
Total other comprehensive income (loss) 1,276 2,935 7,132 (497)
---------- ---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 10,045 $ (1,535) $ (1,702) $ (8,946)
========== ========== ========== ==========
17
16. 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
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. The operating impact of
internet initiatives for the first nine months of 2001 was limited to $8.9
million of write-downs on equity internet investments made predominantly in 1999
and 2000.
18
The following tables summarize financial information by industry segment
for the periods indicated. 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 -- SEPTEMBER 30, 2002
REVENUES:
Real estate services $ 151,669 $ 36,133 $ -- $ 187,802
Property operations 2,380 -- -- 2,380
------------ ------------ ------------ ------------
TOTAL REVENUES 154,049 36,133 -- 190,182
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 10,354 2,518 (4,524) 8,348
OTHER INCOME AND EXPENSE:
Interest income 450 6 390 846
Other income 1,290 -- 5 1,295
Interest expense (64) (3) (2,339) (2,406)
Property interest expense (670) -- -- (670)
Equity earnings (loss) in real estate ventures 70 -- -- 70
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 11,364 $ 2,521 $ (6,402) $ 7,483
============ ============ ============ ============
NINE MONTHS ENDED -- SEPTEMBER 30, 2002
REVENUES:
Real estate services $ 408,928 $ 105,142 $ -- $ 514,070
Property operations 6,930 -- -- 6,930
------------ ------------ ------------ ------------
TOTAL REVENUES 415,858 105,142 -- 521,000
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 18,546 7,742 (11,152) 15,136
OTHER INCOME AND EXPENSE:
Interest income 1,635 9 1,286 2,930
Other income 1,256 -- 52 1,308
Interest expense (358) (14) (6,383) (6,755)
Property interest expense (1,621) -- -- (1,621)
Equity earnings in real estate ventures 1,516 -- -- 1,516
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 20,974 $ 7,737 $ (16,197) $ 12,514
============ ============ ============ ============
Total assets $ 703,680 $ 63,164 $ 65,662 $ 832,506
Real estate investments 135,717 -- -- 135,717
19
INTERNET
COMMERCIAL RESIDENTIAL INITIATIVES OTHER TOTAL
---------- ----------- ----------- ---------- ----------
(In thousands)
THREE MONTHS ENDED -- SEPTEMBER 30, 2001
REVENUES:
Real estate services $ 114,978 $ 431,328 $ -- $ -- $ 146,306
Property operations 720 -- -- -- 720
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES 115,698 31,328 -- -- 147,026
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (3,700) 346 -- (2,420) (5,774)
OTHER INCOME AND EXPENSE:
Losses from internet investments -- -- (1,779) -- (1,779)
Interest and other income 432 4 -- 535 971
Interest expense (150) (11) -- (2,930) (3,091)
Property interest expense (305) -- -- -- (305)
Foreign currency transaction gains -- -- -- 17 17
Equity earnings in real estate ventures 234 -- -- -- 234
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ (3,489) $ 339 $ (1,779) $ (4,798) $ (9,727)
========== ========== ========== ========== ==========
NINE MONTHS ENDED -- SEPTEMBER 30, 2001
REVENUES:
Real estate services $ 399,415 $ 92,250 $ -- $ -- $ 491,665
Property operations 3,189 -- -- -- 3,189
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES 402,604 92,250 -- -- 494,854
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 10,814 583 -- (8,838) 2,559
OTHER INCOME AND EXPENSE:
Losses from internet investments -- -- (8,870) -- (8,870)
Interest and other income 1,532 4 -- 2,265 3,801
Interest expense (461) (32) -- (9,221) (9,714)
Property interest expense (1,477) -- -- -- (1,477)
Foreign currency transaction gains -- -- -- 356 356
Equity earnings in real estate ventures 1,288 -- -- -- 1,288
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 11,696 $ 555 $ (8,870) $ (15,438) $ (12,057)
========== ========== ========== ========== ==========
Total assets $ 555,095 $ 164,052 $ 5,332 $ 49,599 $ 774,078
Real estate investments 70,390 -- -- -- 70,390
20
Certain geographic information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
TOTAL REVENUES 2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands)
United States $ 141,800 $ 119,438 $ 397,007 $ 410,404
United Kingdom 32,640 23,839 82,579 73,825
France 11,502 -- 29,584 --
Other countries 4,240 3,749 11,830 10,625
---------- ---------- ---------- ----------
$ 190,182 $ 147,026 $ 521,000 494,854
========== ========== ========== ==========
SEPTEMBER 30
-----------------------
LONG-LIVED ASSETS 2002 2001
---------- ----------
(In thousands)
United States $ 347,465 $ 360,529
United Kingdom 114,158 109,261
France 24,409 --
Other countries 6,570 8,628
---------- ----------
$ 492,602 $ 478,750
========== ==========
Long-lived assets are comprised of property and equipment, real estate
investments, goodwill and acquired intangibles. Long-lived assets in the United
States include $37.0 million pertaining to a development parcel in St. Thomas,
United States Virgin Islands.
17. 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 average cost of funds borrowed by Insignia, which was
approximately 5.2% at September 30, 2002. The loan is payable on or before March
5, 2005. The Company deducts quarterly interest payments due on the loan from
certain bonuses payable to the Chairman. To the extent such bonuses are not
paid, all accrued and unpaid interest is payable at maturity. 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 average
cost of funds borrowed by Insignia, which was approximately 5.2% at September
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 the average cost of funds borrowed by Insignia, which was approximately
5.2% at September 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
(but subject to Insignia's right of offset as more fully described below), 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. Pursuant to its rights under the note, beginning on August 1, 2002,
Insignia began withholding 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. In October 2002, the Company withheld $6,995 from
distributions payable to the employee pursuant to its rights under the note.
21
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
non-recourse to the employee except to the extent of 25% of the outstanding
amount. At September 30, 2002, the loans outstanding totaled $1.2 million and
are presented as a reduction of stockholders' equity in the Company's
consolidated balance sheet.
18. 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 October 30, 2002, the Company was not aware of any matters that would
give rise to a material claim under any warranties and indemnities.
22
Environmental
Under various federal and state environmental laws and regulations, a
current or previous owner or operator of real estate may be required to
investigate and remediate certain hazardous or toxic substances or
petroleum-product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The owner or operator of a site may be liable
under common law to third parties for damages and injuries resulting from
environmental contamination emanating from or at the site, including the
presence of asbestos containing materials. Insurance for such matters may not be
available.
The presence of contamination or the failure to remediate contamination may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral. There can be no assurance that Insignia, or
any assets owned or controlled by Insignia (as on-site property manager),
currently are in compliance with all of such laws and regulations or that
Insignia will not become subject to liabilities that arise in whole or in part
out of any such laws, rules or regulations. The liability may be imposed even if
the original actions were legal and Insignia did not know of, or was not
responsible for, the presence of such hazardous or toxic substances. Insignia
may also be solely responsible for the entire payment of any liability if it is
subject to joint and several liability with other responsible parties who are
unable to pay. Insignia may be subject to additional liability if it fails to
disclose environmental issues to a buyer or lessee of property. Management is
not currently aware of any environmental liabilities that are expected to have a
material adverse effect upon the operations or financial condition of the
Company.
23
19. Equity
During the nine month period ended September 30, 2002, the Company had the
following changes in stockholders' equity:
a) Net loss of $8,834,000, including $20,635,000 (net of tax benefit)
with respect to the cumulative effect of a change in accounting
principle.
b) Issuance of 125,000 shares, or $12,500,000, of Series B convertible
preferred stock (less $175,000 of issuance costs) that carries an 8.5%
annual dividend and is convertible into Insignia common stock at a
price of $15.40.
c) Exchange of 250,000 shares, or $25,000,000, of convertible preferred
stock, originally issued in February 2000, for Series A convertible
preferred stock that carries an 8.5% annual dividend and is
convertible into Insignia common stock at a price of $14.00 per share.
This exchange with the existing holder did not change total
stockholders' equity.
d) Preferred stock dividends totaling $1,032,000 paid in cash.
e) Exercise of stock options to purchase 102,967 shares of Insignia
common stock at exercise prices ranging from $4.08 to $11.59 per
share.
f) Sale of 78,809 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 85,645 shares of Insignia common stock (at issue date
market values averaging approximately $10.00 per share) for vested
restricted stock awards. Accrued compensation expense relating to
restricted stock totaled $463,000 for the nine-month period of 2002.
i) Payments of $113,000 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.
j) Other comprehensive income of $7,132,000, net of applicable taxes, for
the nine months ended September 30, 2002, arising substantially from
the translation of European net assets at higher exchange rates.
k) Stock option expense of $116,000 representing the estimated value of
employee stock options issued during 2002, which is added to
additional paid-in capital and charged to net income.
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 October 31, 2002, Insignia had not
initiated any stock repurchases under this authorization.
24
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Insignia 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 before depreciation, amortization,
property dispositions and impairments, internet investment results and income
taxes. Net EBITDA deducts all interest expense and includes Funds From
Operations ("Real estate 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.
Insignia's 2002 third quarter was highlighted by very strong year-over-year
performance in Europe, especially the United Kingdom which benefited from a
strong investment market and robust demand for valuation services. Also,
strength in the Company's New York residential sales and brokerage unit,
Insignia Douglas Elliman, continued in the third quarter, although at a lessened
pace from the first two quarters of 2002, which were unusually robust. The
Company's U.S. commercial real estate services business, Insignia/ESG, continues
to face soft markets, but benefited from continued expense containment measures
and the stronger relative performance of its flagship New York operation.
For the third quarter of 2002, Net EBITDA totaled $13.0 million, up
significantly from $3.5 million for the third quarter of 2001. Service revenues
for the third quarter of 2002 totaled $187.8 million, an increase from $146.3
million for the same period in 2001. The increase in revenues reflects year-over
year improvement in all virtually operating units and an $11.5 million
contribution from the Company's French business unit acquired in late December
2001. For the third quarter of 2002, the Company reported income from continuing
operations of $4.1 million ($0.14 per diluted share), an improvement from a loss
of $5.4 million ($0.25 per diluted share) in the third quarter of 2001. Net
income for the third quarter of 2002 totaled $8.8 million ($0.34 per diluted
share), compared to a net loss of $4.5 million ($0.21 per diluted share) for the
same period of 2001. Earnings for the 2002 third quarter were aided by a $4.7
million tax benefit in discontinued operations related to the January 2002 sale
of Realty One. The capital loss resulting from the Realty One sale had been
fully reserved due to uncertainty of the deductibility of the loss. In the third
quarter of 2002, it was determined that the loss would be fully deductible,
requiring the recognition of a tax benefit. Results for the third quarter of
2001 were adversely impacted by the effects of the September 11th terrorist
attacks on New York and Washington as well as $1.8 million of Internet losses.
Goodwill amortization was discontinued effective January 1, 2002 as required by
new accounting standards. The Company incurred $4.4 million of such amortization
expense in the third quarter of 2001.
For the first nine months of 2002, Net EBITDA totaled $31.2 million, up 4%
from $30.1 million for the same period of 2001. Service revenues reached $514.1
million, up 5% from $491.7 million for the 2001 period. Income from continuing
operations for the nine months of 2002 was $6.9 million ($0.23 per diluted
share), an improvement from a loss of $6.9 million ($0.35 loss per diluted
share) for the nine months of 2001. The 2001 loss included $8.9 million of
internet investment losses and $12.9 million of goodwill amortization. Net
losses for the nine months of 2002 and 2001 included the cumulative effect of
the goodwill accounting change (2002) and the operations of the discontinued
Realty One business (2001). As a result, the Company reported net losses of $8.8
million ($0.43 per diluted share) in 2002 versus $8.4 million ($0.42 per diluted
share) in 2001.
Earnings per share for the nine months of 2002 is affected by a 9% increase
in average diluted shares over 2001. Diluted shares increased by 1.9 million for
the nine months of 2002 as a result of (i) an 800,000 share dilutive effect of
options and warrants that were non-dilutive by virtue of reported losses in
2001, (ii) 500,000 shares issued to employees pursuant to stock option exercises
and stock plan purchases and (iii) 534,000 shares issued in connection with the
Insignia Bourdais acquisition.
The 2002 results continued to reflect caution by US corporate clients
worldwide. They are particularly wary of making long-term commitments for office
space due to the uncertainty in the economy and financial markets. As a
consequence, the time needed to complete transactions has lengthened
significantly. Compared with the accelerated pace of activity in the late 1990s
and 2000, office leases and property investment sales -- including those in our
real estate investment portfolio -- are now taking much longer to consummate. A
slow office leasing environment affects Insignia/ESG, the domestic commercial
services business, more than Insignia's other businesses.
25
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 nine months ended September 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 consolidated statements of operations for the periods then ended.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands)
REAL ESTATE SERVICES REVENUES
Commercial -- United States $ 103,287 $ 87,390 $ 284,935 $ 314,965
Commercial -- International 48,382 27,588 123,993 84,450
Residential 36,133 31,328 105,142 92,250
--------- --------- --------- ---------
Total real estate service revenues 187,802 146,306 514,070 491,665
--------- --------- --------- ---------
COSTS AND EXPENSES
Real estate services 169,435 140,116 471,009 452,087
Administrative 4,502 2,399 11,085 8,781
--------- --------- --------- ---------
EBITDA -- REAL ESTATE SERVICES (1) 13,865 3,791 31,976 30,797
Real estate FFO (2) 683 1,807 3,095 4,830
Interest and other income 835 988 2,932 4,157
Interest expense (2,406) (3,091) (6,755) (9,714)
--------- --------- --------- ---------
NET EBITDA (1) 12,977 3,495 31,248 30,070
Gains on sales of real estate 3,263 161 5,006 625
Real estate impairment (1,577) -- (1,699) --
Depreciation -- property and equipment (4,541) (3,954) (13,082) (11,238)
Amortization of intangibles (1,030) (5,829) (4,139) (18,480)
Real estate depreciation (3) (1,609) (1,821) (4,820) (4,164)
--------- --------- --------- ---------
INCOME (LOSS) FROM REAL ESTATE OPERATIONS 7,483 (7,948) 12,514 (3,187)
Losses from internet investments -- (1,779) -- (8,870)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 7,483 (9,727) 12,514 (12,057)
Income tax (expense) benefit (3,367) 4,331 (5,631) 5,130
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 4,116 (5,396) 6,883 (6,927)
Discontinued operations, net of taxes:
Operating income (loss) -- 926 -- (1,522)
Adjustment to loss on disposal 4,653 -- 4,918 --
--------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 8,769 (4,470) 11,801 (8,449)
Cumulative effect of a change in accounting
principle, net of $9.4 million tax benefit -- -- (20,635) --
--------- --------- --------- ---------
NET INCOME (LOSS) 8,769 (4,470) (8,834) (8,449)
Preferred stock dividends (800) (250) (1,373) (750)
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 7,969 $ (4,720) $ (10,207) $ (9,199)
--------- --------- --------- ---------
(1) Neither EBITDA nor Net EBITDA, as disclosed above, should be construed to
represent cash provided by operations determined pursuant to GAAP. These
measures are not defined by GAAP and Insignia's usage of these terms may differ
from other companies' usage of the same or similar terms. As compared to net
income, the
26
EBITDA and Net EBITDA measures effectively eliminate the impact of non-cash
charges for depreciation, amortization of intangible assets and other charges.
Management believes that the presentation of these supplemental measures enhance
a reader's understanding of the Company's operating performance as they provide
a measure of generated cash.
(2) 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. This measure is not defined by GAAP and Insignia's usage of this
term may differ from other companies' usage of the same or similar terms.
Management uses this supplemental measure in the evaluation of principal real
estate investment activities and believes that it provides a measure of
generated cash flows for the Company's real estate operations.
(3) Real estate depreciation represents the depreciation attributed to the three
consolidated real estate properties as well as the portion of depreciation
expense of equity real estate investees attributed to Insignia's ownership.
Commercial Real Estate Services
Insignia's commercial real estate service operations include Insignia/ESG
in the United States, Insignia Richard Ellis in the United Kingdom, Insignia
Bourdais in France and other subsidiaries in Germany, Italy, Belgium, the
Netherlands, Spain, Asia and Latin America. Commercial real estate services
revenues of $151.7 million for the third quarter of 2002 reflect a 32%
improvement from $115.0 million for the same period of 2001. Commercial EBITDA
of $14.7 million in 2002 significantly exceeded the $4.1 million for the third
quarter of 2001. For the nine months of 2002, commercial revenues were up 2% to
$408.9 million. Insignia Bourdais contributed $29.6 million to revenues in 2002.
EBITDA of $32.0 million for the nine months of 2002 reflects a decline from 2001
EBITDA of $33.9 million.
United States
The Company's U.S. commercial services unit, Insignia/ESG, experienced weak
leasing markets nationwide. U.S. revenues and EBITDA totaled $103.3 million and
$7.5 million, respectively, for the third quarter of 2002. While revenues were
up 18% and EBITDA was up 156% over the third quarter of 2001 , performance was
low by historical third quarter standards. The performance of Insignia/ESG for
the third quarter of 2002 does reflect improvement from prior quarters in 2002,
although the general economic uncertainty and sluggish pace of leasing activity
continues to hamper performance. U.S. revenues totaled $284.9 million for the
nine months of 2002, down 10% from the same period of 2001, and EBITDA totaled
$17.6 million, down 35% from $27.2 million in 2001. Nearly half of the decline
was derived from the development business, which has not sold an asset in 2002.
Development income totaled $4.6 million for the nine months of 2001. The
remainder of the 2002 decline is attributed to lower leasing volume. The revenue
decline was partially mitigated by discipline in controlling non-essential
expenses, which decreased by over $8.0 million from 2001 levels. Conversely, the
U.S. EBITDA margin declined in 2002 due to uncontrollable expenditures,
including, predominantly, higher occupancy costs and bad debts. During the nine
months of 2002, occupancy costs increased by approximately $3.0 million over
2001 levels as a result of new leases or renewals at higher rent levels in
several US markets, most notably Boston and the Company's headquarters at 200
Park Avenue in New York City.
Europe
European operations continue to exhibit strength in difficult times, fueled
by investment activity and valuation services in the UK and positive
contributions from Insignia Bourdais in France (which was acquired at the end of
2001). European EBITDA totaled $8.2 million for the third quarter of 2002, up
from $2.4 million in the third quarter of 2001. European revenues were $46.4
million for the third quarter of 2002, up 75% from $26.5 million in 2001. The
2002 third quarter included Insignia Bourdais revenues of $11.5 million and
EBITDA of $2.3 million. Other European operations produced EBITDA loss of
$900,000 for the 2002 third quarter. For the nine months of 2002, European
EBITDA was $17.3 million, up from $9.5 million in the same period in 2001.
European revenues of $119.3 million for the nine months of 2002 reflect a 46%
increase over $81.9 million in 2001. The strength of European operations in the
nine months of 2002 is attributable to the Insignia Bourdais acquisition and
improved performance in the UK. Insignia Bourdais in France contributed revenues
of $29.6 million and EBITDA of $4.8 million during the nine months of 2002. The
European results reflect a substantial reduction in leasing activity in markets
other than Paris.
27
Insignia's European operating results in 2002 have been translated into
U.S. dollars at average exchange rates of $1.49 to the pound and $0.93 to the
euro. In 2001, European operating results were translated into U.S. dollars at
average exchange rates of $1.44 to the pound and $0.89 to the euro. The change
in currency translation rates accounts for approximately $500,000 of the
improved European performance in 2002.
Asia and Latin America
The Company's operations in Asia and Latin America launched in 2001
continue to build their service platforms, although performance remains
constrained by very weak commercial real estate markets in Asia. Latin American
performance improved aided by the completion of one of the largest office leases
ever in Mexico in the third quarter of 2002. These operations incurred and
EBITDA loss of $1 million for the third quarter of 2002 on $2.0 million in
revenues. The EBITDA loss was $2.8 million for the first nine months of 2002 on
$4.7 million in revenues. The poor 2002 performance compares to EBITDA losses of
approximately $1.2 million and $2.8 million, respectively, for the quarter and
nine months of 2001. The losses are, for the most part, attributable to
Insignia's building of a competitive presence in Tokyo, Hong Kong and Shanghai.
Residential Real Estate Services
The Company's residential real estate services consist of co-op and
apartment brokerage through Insignia Douglas Elliman and property management
services through Insignia Residential Group. These residential operations
continue to benefit from a strong New York co-op and condo sales market. In the
third quarter of 2002, residential service revenues totaled $36.1 million, an
increase of 15% over $31.3 million for the same quarter of 2001, and residential
EBITDA increased materially to $3.6 million, a 71% increase over $2.1 million
for the third quarter 2001. Insignia Douglas Elliman generated service revenues
and EBITDA of $29.5 million and $3.5 million, respectively, during the 2002
third quarter, representing increases of 18% and 77% over the 2001 period.
Insignia Douglas Elliman's gross transaction volume totalled $775 million for
the third quarter of 2002, reflecting an 18% increase from the same period in
2001, while the number of units sold increased 24% to 991. The average sales
price during the 2002 third quarter decreased by 5% from 2001 to approximately
$782,000, reflecting a higher proportion of sales activity at the lower end of
the pricing spectrum.
For the first nine months of 2002, revenues from residential operations
climbed 14% to $105.1 million, while EBITDA improved 94%, or $5.3 million,