U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 Or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2003
[ ] Transition Report Under Section 13 Or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from ______ to _____
Commission file number 1-10324
THE INTERGROUP CORPORATION
--------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3293645
------------------------------ ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
820 Moraga Drive Los Angeles, CA 90049
--------------------------------------
(Address of Principal Executive Offices)
(310) 889-2500
-------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of February 12, 2004 were 2,509,686 shares.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
THE INTERGROUP CORPORATION
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (unaudited)
As Of December 31, 2003 3
Consolidated Statements of Operations (unaudited)
For the Three Months Ended December 31, 2003 and 2002 4
Consolidated Statements of Operations (unaudited)
For the Six Months Ended December 31, 2003 and 2002 5
Consolidated Statements of Cash Flows (unaudited)
For the Six months Ended December 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
-2-
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of December 31, 2003
-----------
ASSETS
Investment in real estate, at cost:
Land $ 26,124,000
Buildings, improvements and equipment 56,117,000
Property held for sale or development 928,000
-----------
83,169,000
Less: accumulated depreciation (20,013,000)
-----------
63,156,000
Investment in Justice Investors 8,945,000
Cash and cash equivalents 1,929,000
Restricted cash 2,766,000
Investment in marketable securities 84,730,000
Prepaid expenses and other assets 3,123,000
-----------
Total assets $164,649,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable $ 69,265,000
Due to securities broker 30,272,000
Obligation for securities sold 29,346,000
Accounts payable and other liabilities 3,986,000
Deferred income taxes 6,868,000
-----------
Total liabilities 139,737,000
-----------
Minority interest 8,628,000
-----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares
authorized; none issued -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,193,745 issued, 2,509,686 outstanding 21,000
Common stock, class A $.01 par value, 2,500,000 shares
authorized; none issued -
Additional paid-in capital 8,686,000
Retained earnings 14,219,000
Treasury stock, at cost, 684,059 shares (6,642,000)
-----------
Total shareholders' equity 16,284,000
-----------
Total liabilities and shareholders' equity $164,649,000
===========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months ended December 31, 2003 2002
----------- -----------
Real estate operations:
Rental income $ 3,081,000 $ 3,650,000
Rental expenses:
Property operating expenses (1,805,000) (1,821,000)
Mortgage interest expense (926,000) (886,000)
Real estate taxes (383,000) (452,000)
Depreciation (642,000) (708,000)
----------- -----------
Loss from real estate operations (675,000) (217,000)
----------- -----------
Equity in net income of Justice Investors 236,000 372,000
----------- -----------
Investment transactions:
Net investment gains 6,583,000 578,000
Dividend and interest income 223,000 41,000
Margin interest and trading expenses (1,932,000) (244,000)
----------- -----------
Income from investment transactions 4,874,000 375,000
----------- -----------
Other income(expense):
General and administrative expenses (483,000) (609,000)
Other income, net 49,000 42,000
----------- -----------
Other expense (434,000) (567,000)
----------- -----------
Income(loss) before provision for income
taxes and minority interest 4,001,000 (37,000)
Provision for income tax (expense)benefit (1,601,000) 33,000
----------- -----------
Income(loss) before minority interest 2,400,000 (4,000)
Minority interest (444,000) (226,000)
----------- -----------
Net income(loss) $ 1,956,000 $ (230,000)
=========== ===========
Basic income(loss) per share $ 0.78 $ (0.08)
=========== ===========
Weighted average number of shares outstanding 2,522,585 2,744,256
=========== ===========
Diluted income(loss) per share $ 0.68 $ (0.08)
=========== ===========
Diluted weighted average number of shares
outstanding 2,855,585 2,744,256
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months ended December 31, 2003 2002
----------- -----------
Real estate operations:
Rental income $ 6,543,000 $ 6,988,000
Rental expenses:
Property operating expenses (3,552,000) (3,358,000)
Mortgage interest expense (1,754,000) (1,723,000)
Real estate taxes (759,000) (793,000)
Depreciation (1,317,000) (1,364,000)
----------- -----------
Loss from real estate operations (839,000) (250,000)
----------- -----------
Equity in net income of Justice Investors 444,000 871,000
----------- -----------
Investment transactions:
Net investment gains(losses) 8,611,000 (711,000)
Dividend and interest income 374,000 141,000
Margin interest and trading expenses (2,454,000) (464,000)
----------- -----------
Income(loss) from investment transactions 6,531,000 (1,034,000)
----------- -----------
Other income(expense):
General and administrative expenses (841,000) (976,000)
Other income, net 62,000 46,000
----------- -----------
Other expense (779,000) (930,000)
----------- -----------
Income(loss) before provision for income
taxes and minority interest 5,357,000 (1,343,000)
Provision for income tax (expense)benefit (2,143,000) 523,000
----------- -----------
Income(loss) before minority interest 3,214,000 (820,000)
Minority interest (657,000) 55,000
----------- -----------
Net income(loss) $ 2,557,000 $ (765,000)
=========== ===========
Basic income(loss) per share $ 1.01 $ (0.28)
=========== ===========
Weighted average number of shares outstanding 2,526,442 2,754,215
=========== ===========
Diluted income(loss) per share $ 0.89 $ (0.28)
=========== ===========
Diluted weighted average number of shares
outstanding 2,859,442 2,754,215
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
THE INTEGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended December 31, 2003 2002
----------- -----------
Cash flows from operating activities:
Net income(loss) $ 2,557,000 $ (765,000)
Adjustments to reconcile net income(loss) to
cash used in operating activities:
Depreciation of real estate 1,317,000 1,364,000
Net unrealized gains on investments (5,319,000) (1,785,000)
Equity in net income from Justice Investors (444,000) (871,000)
Minority interest 657,000 (55,000)
Changes in assets and liabilities:
Restricted cash 745,000 (236,000)
Investment in marketable securities (24,472,000) (6,598,000)
Prepaid expenses and other assets 269,000 (1,709,000)
Accounts payable and other liabilities (437,000) (427,000)
Due to broker 9,951,000 5,637,000
Obligations for securities sold 12,857,000 1,333,000
Deferred income taxes 1,397,000 1,708,000
----------- -----------
Net cash used in operating activities (922,000) (2,404,000)
----------- -----------
Cash flows from investing activities:
Investment in real estate (700,000) (53,000)
Additions to buildings, improvements
and equipment (803,000) (706,000)
Distributions from Justice Investors 636,000 1,004,000
Purchase of Santa Fe stock (923,000) -
----------- -----------
Net cash (used in)provided by
investing activities (1,790,000) 245,000
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 8,275,000 10,118,000
Principal payments on mortgage notes payable (5,126,000) (3,934,000)
Repayment of line of credit - (4,000,000)
Purchase of treasury stock (252,000) (530,000)
Dividends paid to minority shareholders (115,000) (63,000)
----------- -----------
Net cash provided by financing activities 2,782,000 1,591,000
----------- -----------
Net increase(decrease) in cash and cash
equivalents 70,000 (568,000)
Cash and cash equivalents at beginning of
period 1,859,000 1,883,000
----------- -----------
Cash and cash equivalents at end of period $ 1,929,000 $ 1,315,000
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
THE INTERGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements included herein are unaudited; however,
in the opinion of The InterGroup Corporation ("InterGroup" or the "Company"),
the interim financial information contains all adjustments, including normal
recurring adjustments, necessary to present fairly the results for the interim
period. These consolidated financial statements include the accounts of the
Company and its subsidiaries and should be read in conjunction with the
Company's June 30, 2003 audited consolidated financial statements and notes
thereto.
As of December 31, 2003, the Company had the power to vote 74.5% of the voting
shares of Santa Fe Financial Corporation ("Santa Fe"), a public company (Nasdaq
SmallCap: SFEF). Santa Fe's revenue is primarily generated through the
management of its 68.8% owned subsidiary, Portsmouth Square, Inc.
("Portsmouth"), which derives its revenue primarily as a general partner and a
49.8% limited partner in Justice Investors ("Justice"), a California limited
partnership. Justice owns the land, improvements and leaseholds known as the
Holiday Inn Financial District/Chinatown, a 566-room hotel in San Francisco,
California.
The results of operations for the three and six months ended December 31, 2003
are not necessarily indicative of results to be expected for the full fiscal
year ending June 30, 2004.
Earnings Per Share
Basic earnings per share are computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding. The computation of diluted earnings per share is similar to the
computation of basic earnings per share except that the weighted-average number
of common shares is increased to include the number of additional common shares
that would have been outstanding if potential dilutive common shares had been
issued. The Company's only potentially dilutive common shares are stock
options. Stock options are included in diluted earnings per share by
application of the treasury stock method. As of December 31, 2003, the Company
had 333,000 stock options that were considered potentially dilutive common
shares. These amounts were included in the calculation for diluted earnings
per share.
Stock-Based Compensation Plans
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No.25 (APB 25), Accounting for Stock Issued
to Employees, whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over
the amount an employee must pay to acquire the stock. Stock options issued
under the Company's stock option plan have no intrinsic value at the grant
date, and under APB 25 no compensation cost is recognized.
-7-
The Company has elected to continue with the accounting methodology in APB 25
and, as a result, has provided pro forma disclosures of net income and earnings
per share and other disclosures, as if the fair value based method of
accounting had been applied.
As required by FAS 123, the Company has determined the pro-forma information as
if the Company had accounted for stock options granted since January 1, 1998,
under the fair value method of FAS 123. The Black-Scholes option pricing model
was used with the following weighted-average assumptions for December 31, 2003;
risk-free interest rate of 2.50%; dividend yield of 0%; expected Common Stock
market price volatility factor of 33.81; and a expected life of the options of
10 years. The fair value of options granted in during the six months ended
December 31, 2003 were $6.21 per share. The aggregate fair value of the
options granted during the six months ended December 31, 2003, were $93,000.
Stock based compensation is accounted for under APB 25 and accordingly, no
compensation cost has been recognized for stock options in the financial
statements. Had compensation cost been determined based upon the fair value of
the stock options at grant date and consistent with FAS 123, the Company's pro
forma net income and net income per share (based on 15,000 options vesting
during the six months ended December 31, 2003) are as follows:
Net income - as reported $ 2,557,000
Net income - pro forma $ 2,464,000
Income per share - as reported $ 1.01
Income per share - pro forma $ 0.98
2. Investment in Real Estate
In October 2003, the Company obtained a new mortgage loan on one of its
unencumbered properties in the amount of $525,000. The interest rate on the
loan is fixed at 5.75% for the first five years and is adjustable thru maturity
on October 1, 2033.
In November 2003, the Company refinanced four mortgage loans totaling
$2,141,000 and obtained four new mortgage loans totaling $3,535,000. All four
loans share a fixed interest rate of 6.38% for the first ten years of the loan.
After ten years, the interest rate is adjustable thru maturity on December 1,
2018.
3. Marketable Securities:
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading with net change in unrealized gains or
losses included in earnings.
As part of the investment strategies, the Company may assume short positions in
marketable securities. Short sales are used by the Company to potentially
offset normal market risks undertaken in the course of its investing activities
or to provide additional return opportunities. The Company has no naked short
positions. As of December 31, 2003, the Company had obligations for securities
sold(equities short) of $29,346,000.
-8-
The Company may utilize margin for its marketable securities purchases through
the use of standard margin agreements with national brokerage firms. The use
of available leverage is guided by the business judgment of management.
Included in the net gains on marketable securities of $6,583,000 for the three
months ended December 31, 2003 are net unrealized gains of $2,911,000 and net
realized gains of $3,672,000. Included in the net gains on marketable
securities of $578,000 for the three months ended December 31, 2002 are net
unrealized gains of $1,268,000 and net realized losses of $690,000.
Included in the net gains on marketable securities of $8,611,000 for the six
months ended December 31, 2003 are net unrealized gains of $5,319,000 and net
realized gains of $3,292,000. Included in the net losses on marketable
securities of $711,000 for the six months ended December 31, 2002 are net
unrealized gains of $1,785,000 and net realized losses of $2,496,000.
4. Investment in Justice Investors:
The consolidated accounts include a 49.8% interest in Justice Investors, a
California limited partnership ("the partnership"), in which Portsmouth serves
as one of the two general partners. The other general partner, Evon Garage
Corporation ("Evon"), serves as the managing general partner. As a general and
limited partner, Portsmouth has significant control over the management and
operation of the assets of Justice Investors. All significant partnership
decisions require the active participation and approval of both general
partners. The Company and Evon jointly consult and determine the amount of
partnership reserves and the amount of cash to be distributed to the limited
partners.
The partnership derives most of its income from a lease of its San Francisco,
California hotel property to Felcor Lodging Trust, Inc. ("Felcor") and from a
lease of the garage portion of the property to Evon. As a general partner, the
Company and its subsidiaries are active in monitoring and overseeing the
operations of the hotel and parking garage.
Pursuant to the terms of the partnership agreement, voting rights of the
partners are determined according to the partners' entitlement to share in the
net profit and loss of the partnership. The Company is not entitled to any
additional voting rights by virtue of its position as a general partner.
The partnership agreement also provides that no portion of the partnership real
property can be sold without the written consent of the general and limited
partners entitled to more than 72% of the net profit.
The Company amortizes the difference between the cost basis of its investment
in Justice Investors and its share of the net assets allocable to depreciable
assets of Justice Investors over 40 yrs.
For the Company's investment in Justice, to the extent that projected future
undiscounted cash flows from the operation of the Company's hotel property are
less than the carrying value of the asset, the investment would be considered
permanently impaired and the carrying value of the asset would be reduced to
its fair value.
-9-
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
As of December 31, 2003
----------
Assets
Total current assets $ 170,315
Loan fees and deferred lease costs,
net of accumulated amortization of $272,362 38,050
Property, plant and equipment, net of
accumulated depreciation of $12,951,516 5,873,328
Construction in progress 138,788
Land 1,124,128
----------
Total assets $ 7,344,609
==========
Liabilities and partners' capital
Total current liabilities $ 399,774
Long term debt 3,902,200
Partners' capital 3,042,635
----------
Total liabilities and partners' capital $ 7,344,609
==========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended December 31, 2003 2002
---------- ----------
Revenues $ 1,305,260 $ 901,594
Costs and expenses (712,211) (155,722)
---------- ----------
Net income $ 593,049 $ 745,872
========== ==========
For the six months ended December 31, 2003 2002
---------- ----------
Revenues $ 2,317,141 $ 2,093,067
Costs and expenses (1,186,419) (344,610)
---------- ----------
Net income $ 1,130,722 $ 1,748,457
========== ==========
5. Related Parties
John V. Winfield serves as Chief Executive Officer and Chairman of the Company,
Portsmouth, and Santa Fe. Depending on certain market conditions and various
risk factors, the Chief Executive Officer, his family, Portsmouth and Santa Fe
may, at times, invest in the same companies in which the Company invests. The
Company encourages such investments because it places personal resources of the
Chief Executive Officer and his family members, and the resources of Portsmouth
and Santa Fe, at risk in connection with investment decisions made on behalf of
the Company.
-10-
6. Segment Information
The Company operates in three reportable segments, the operations of its multi-
family residential properties, the operation of Justice Investors, and the
investment of its cash and securities assets. These three operating segments,
as presented in the financial statements, reflect how management internally
reviews each segment's performance. Management also makes operational and
strategic decisions based on this information.
Information below represents reported segments for the three and six months
ended December 31, 2003 and the three and six months ended December 31, 2002.
Operating income for rental properties consists of rental income. Operating
income from Justice Investors consists of the operations of the hotel and
garage included in the equity in net income of Justice Investors. Operating
income (losses) for investment transactions consist of net investment
gains(losses)and dividend and interest income.
Real Estate
-------------------------
Three months ended Rental Justice Investment
December 31, 2003 Properties Investors Transactions Other Total
----------- ----------- ------------ ----------- ------------
Operating income $ 3,081,000 $ 236,000 $ 6,806,000 $ - $ 10,123,000
Operating expenses (1,805,000) - (1,932,000) - (3,737,000)
Real estate taxes (383,000) - - - (383,000)
----------- ----------- ----------- ----------- ------------
Net operating income 893,000 236,000 4,874,000 - 6,003,000
Mortgage interest expenses (926,000) - - - (926,000)
Depreciation (642,000) - - - (642,000)
General and administrative
expenses - - - (483,000) (483,000)
Other income - - - 49,000 49,000
Income tax expense - - - (1,601,000) (1,601,000)
Minority interest - - - (444,000) (444,000)
----------- ----------- ----------- ----------- ------------
Net income(loss) $ (675,000) $ 236,000 $ 4,874,000 $(2,479,000) $ 1,956,000
=========== =========== =========== =========== ============
Total Assets $63,156,000 $ 8,945,000 $84,730,000 $ 7,818,000 $164,649,000
=========== =========== =========== =========== ============
Real Estate
-------------------------
Three months ended Rental Justice Investment
December 31, 2002 Properties Investors Transactions Other Total
----------- ----------- ------------ ----------- ------------
Operating income(loss) $ 3,650,000 $ 372,000 $ 619,000 $ - $ 4,641,000
Operating expenses (1,821,000) - (244,000) - (2,065,000)
Real estate taxes (452,000) - - (452,000)
----------- ----------- ----------- ----------- ------------
1,377,000 372,000 375,000 - 2,124,000
Mortgage interest expenses (886,000) - - - (886,000)
Depreciation (708,000) - - - (708,000)
General and administrative
expenses - - - (609,000) (609,000)
Other income - - - 42,000 42,000
Income tax benefit - - - 33,000 33,000
Minority interest - - - (226,000) (226,000)
----------- ----------- ----------- ----------- ------------
Net income (loss) $ (217,000) $ 372,000 $ 375,000 $ (760,000) $ (230,000)
=========== =========== =========== =========== ============
Total Assets $63,348,000 $ 9,615,000 $16,077,000 $ 5,140,000 $ 94,180,000
=========== =========== =========== =========== ============
-11-
Real Estate
-------------------------
Six months ended Rental Justice Investment
December 31, 2003 Properties Investors Transactions Other Total
----------- ----------- ------------ ----------- ------------
Operating income $ 6,543,000 $ 444,000 $ 8,985,000 $ - $ 15,972,000
Operating expenses (3,552,000) - (2,454,000) - (6,006,000)
Real estate taxes (759,000) - - - (759,000)
----------- ----------- ----------- ----------- ------------
Net operating income 2,232,000 444,000 6,531,000 - 9,207,000
Mortgage interest expenses (1,754,000) - - - (1,754,000)
Depreciation (1,317,000) - - - (1,317,000)
General and administrative
expenses - - - (841,000) (841,000)
Other income - - - 62,000 62,000
Income tax expense - - - (2,143,000) (2,143,000)
Minority interest - - - (657,000) (657,000)
----------- ----------- ----------- ----------- ------------
Net income(loss) $ (839,000) $ 444,000 $ 6,531,000 $(3,579,000) $ 2,557,000
=========== =========== =========== =========== ============
Total Assets $63,156,000 $ 8,945,000 $84,730,000 $ 7,818,000 $164,649,000
=========== =========== =========== =========== ============
Real Estate
-------------------------
Six months ended Rental Justice Investment
December 31, 2002 Properties Investors Transactions Other Total
----------- ----------- ----------- ----------- ------------
Operating income(loss) $ 6,988,000 $ 871,000 $ (570,000) $ - $ 7,289,000
Operating expenses (3,358,000) - (464,000) - (3,822,000)
Real estate taxes (793,000) - - (793,000)
----------- ----------- ----------- ----------- ------------
2,837,000 871,000 (1,034,000) - 2,674,000
Mortgage interest expenses (1,723,000) - - - (1,723,000)
Depreciation (1,364,000) - - - (1,364,000)
General and administrative
expenses - - - (976,000) (976,000)
Other income - - - 46,000 46,000
Income tax benefit - - - 523,000 523,000
Minority interest - - - 55,000 55,000
----------- ----------- ----------- ----------- ------------
Net income (loss) $ (250,000) $ 871,000 $(1,034,000) $ (352,000) $ (765,000)
=========== =========== =========== =========== ============
Total Assets $63,348,000 $ 9,615,000 $16,077,000 $ 5,140,000 $ 94,180,000
=========== =========== =========== =========== ============
-12-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The discussion below and elsewhere in the Report includes forward-looking
statements about the future business results and activities of the Company,
which, by their very nature, involve a number of risks and uncertainties. When
used in this discussion, the words "estimate", "project", "anticipate" and
similar expressions, are subject to certain risks and uncertainties, such as
the impact of terrorism and war on the national and international economies,
including tourism and the securities markets, changes in general economic
conditions, local real estate markets, and competition, as well as
uncertainties relating to uninsured losses, securities markets, and litigation,
including those discussed below and in the Company's Form 10-KSB for the fiscal
year ended June 30, 2003 that could cause actual results to differ materially
from those projected. Readers are cautioned not to place undue reliance on
these forward-looking statements. The Company undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
For the Three Months Ended December 31, 2003 Compared to the
Three Months Ended December 31, 2002
The Company had a net income of $1,956,000 for the three months ended December
31, 2003 compared to net loss of $230,000 for the three months ended December
31, 2002. The change was primarily due to the increase in gains on marketable
securities, an increase in dividend and interest income and the decrease in
general and administrative expenses partially offset by a higher loss from real
estate operations, a decrease in equity in net income from Justice Investors,
and an increase in margin and trading expenses.
Rental income decreased to $3,081,000 from $3,650,000 due to reduced income of
5% from our non-California properties and a 28% decrease in rental income from
our California properties. The reduction in rental income was due to higher
vacancies and higher rent concessions given to tenants due to a soft rental
market. The decrease was partially offset by the increase in rental income
from our St. Louis, Missouri property and to a lesser extent, the rental income
derived from the leasing of a commercial building in Los Angeles, California.
The equity in net income of Justice Investors decreased to $236,000 from
$372,000. That decrease was primarily attributable to increased partnership
costs in the current quarter for consultants, experts and legal services
relating to the partnership's enforcement of the lessee's obligations under the
lease and additional depreciation and interest costs related to the build-out
of the new spa and meeting rooms in the hotel and other capital improvements.
Although partnership revenues increased to approximately $1,305,000 for the
three months ended December 31, 2003 from $902,000 for the three months ended,
December 31, 2002, that increase was primarily attributable to a $296,000
payment by the hotel lessee in December 2003, for part of the replacement of
the sloped window system of the hotel, which amount was recorded as other
income by Justice Investors. Absent that additional nonrecurring payment,
-13-
partnership revenues increased about $100,000. Many of the factors identified
in fiscal 2003 continued to significantly impact the hotel operations in fiscal
2004. Unlike other areas in California, the Bay Area has been especially slow
to recover from the devastating impact that the terrorist attacks of September
11, 2001, had on tourism and the hospitality industry. The continued weakness
in the Bay Area due to the failure of numerous internet and technology
companies, has also resulted in a decrease in business travel and a reduction
by airlines in the number of flights into San Francisco. The hotel has also
faced more competition from new properties and from higher end properties that
provide greater amenities to its guests, especially for the business traveler.
These properties have also reduced room rates as hotel operators struggle to
obtain occupancy. Average daily room rates for the three months ended December
31, 2003 increased modestly to approximately $92, compared to $89 for the three
months ended December 31, 2002 and average monthly occupancy rates increased to
approximately 64% compared to 62% during the same three month period of fiscal
2002. Based on industry reports, management is expecting a slow recovery in
the San Francisco hotel marketplace.
Net gains on marketable securities increased to gains of $6,583,000 for the
three months ended December 31, 2003 from $578,000 for the three months ended
December 31, 2002. For the three months ended December 31, 2003, the Company
had net unrealized gains of $2,911,000 and net realized gains of $3,672,000.
For the three months ended December 31, 2002, the Company had net unrealized
gains of $1,268,000 and net realized losses of $690,000. Gains and losses on
marketable securities may fluctuate significantly from period to period in the
future and could have a significant impact on the Company's net income.
However, the amount of gain or loss on marketable securities for any given
period may have no predictive value and variations in amount from period to
period may have no analytical value. For a more detailed description of the
composition of the Company's marketable securities please see the Marketable
Securities section below.
Dividend and interest income increased to $223,000 from $41,000 as a result of
the increased investment in dividend yielding securities.
Margin interest and trading expenses increased to $1,932,000 from $244,000
primarily due to a $1,192,000 in performance-based compensation earned by the
Company's CEO for his management of the Company's investment portfolio for the
six months ended December 31, 2003. The remaining increase was due the
maintenance of higher margin balances and increased trading activity. Margin
interest expense increased to $348,000 from $153,000. Trading related expenses
increased to $392,000 from $91,000.
General and administrative expenses decreased to $483,000 from $609,000
primarily as the result of management's efforts to reduce general and
administrative expenses across the board.
Income tax (expense)benefit changed to a tax expense of $1,601,000 from a tax
benefit of $33,000 as the result of income generated in the current quarter
ended December 31, 2003 versus a loss in the quarter ended December 31, 2002.
Minority interest increased to $444,000 from $226,000 due to higher income
generated by the Company's subsidiary in the current quarter ended December 31,
2003.
-14-
For the Six Months Ended December 31, 2003 Compared to the
Six Months Ended December 31, 2002
The Company had a net income of $2,557,000 for the six months ended December
31, 2003 compared to net loss of $765,000 for the six months ended December 31,
2002. The change was primarily due to the increase in gains on marketable
securities, an increase in dividend and interest income and the decrease in
general and administrative expenses partially offset by a higher loss from real
estate operations, a decrease in equity in net income from Justice Investors,
and an increase in margin and trading expenses.
Rental income decreased to $6,543,000 from $6,988,000 due to reduced rental
income of 3% from the non-California properties and a 23% decrease in rental
income from California properties. The reduction in rental income was due to
higher vacancies and higher rent concessions given to tenants due to a soft
rental market. The decrease was partially offset by the increase in rental
income from our St. Louis, Missouri property and to a lesser extent, the rental
income derived from the leasing of a commercial building in Los Angeles,
California.
The equity in net income of Justice Investors decreased to $444,000 from
$871,000. That decrease was primarily attributable to increased partnership
costs in the current quarter for consultants, experts and legal services
relating to the partnership's enforcement of the lessee's obligations under the
lease and additional depreciation and interest costs related to the build-out
of the new spa and meeting rooms in the hotel and other capital improvements.
Although partnership revenues increased to approximately $2,317,000 for the six
months ended December 31, 2003 from $2,093,000 for the six months ended,
December 31, 2002, that increase was attributable to a to a $296,000 payment by
the hotel lessee in December 2003, for part of the replacement of the sloped
window system of the hotel, which amount was recorded as other income by
Justice Investors. Absent that nonrecurring payment, partnership revenues
would have been down approximately $72,000. Many of the factors identified in
fiscal 2003 continued to significantly impact the hotel operations in fiscal
2004. Unlike other areas in California, the Bay Area has been especially slow
to recover from the devastating impact that the terrorist attacks of September
11, 2001, had on tourism and the hospitality industry. The continued weakness
in the Bay Area due to the failure of numerous internet and technology
companies, has also resulted in a decrease in business travel and a reduction
by airlines in the number of flights into San Francisco. The hotel has also
faced more competition from new properties and from higher end properties that
provide greater amenities to its guests, especially for the business traveler.
These properties have also reduced room rates as hotel operators struggle to
obtain occupancy. Average daily room rates declined slightly to approximately
$91 for the six months ended December 31, 2003 from approximately $92 for the
six months ended December 31, 2002 and average monthly occupancy rates remained
the same at approximately 71%. Based on industry reports, management is
expecting a slow recovery in the San Francisco hotel marketplace.
Net gains(losses) on marketable securities changed to net gains of $8,611,000
for the six months ended December 31, 2003 from net losses $711,000 for the six
months ended December 31, 2002. For the six months ended December 31, 2003, the
Company had net unrealized gains of $5,319,000 and net realized gains of
$3,292,000. For the six months ended December 31, 2002, the Company had net
unrealized gains of $1,785,000 and net realized losses of $2,496,000. Gains
and losses on marketable securities may fluctuate significantly from period to
period in the future and could have a significant impact on the Company's net
income. However, the amount of gain or loss on marketable securities for any
given period may have no predictive value and variations in amount from period
to period may have no analytical value. For a more detailed description of the
composition of the Company's marketable securities please see the Marketable
Securities section below.
-15-
Dividend and interest income increased to $374,000 from $141,000 as a result of
the increased investment in dividend yielding securities.
Margin interest and trading expenses increased to $2,454,000 from $464,000
primarily due to a $1,192,000 in performance-based compensation earned by the
Company's CEO for his management of the Company's investment portfolio for the
six months ended December 31, 2003. The remaining increase was due the
maintenance of higher margin balances and increased trading activity. Margin
interest expense increased to $666,000 from $196,000. Trading related expenses
increased to $596,000 from $268,000.
General and administrative expenses decreased to $841,000 from $976,000
primarily as the result of management's efforts to reduce general and
administrative expenses across the board.
Income tax (expense)benefit changed to a tax expense of $2,143,000 from a tax
benefit of $523,000 as the result of income generated in the six months ended
December 31, 2003 versus a loss in the six months ended December 31, 2002.
Minority interest (expense)benefit changed to an expense of $657,000 from a
benefit of $55,000 due to income generated by the Company's subsidiary in
during the six months ended December 31, 2003 as compared to a loss during the
six months ended December 31, 2002.
MARKETABLE SECURITIES
The Company's investment portfolio is diversified with 206 different equity
positions. Only one equity security was more than 5% of the equity value of
the portfolio. This security is 5.2% of the total value of the portfolio. The
amount of the Company's investment in any particular issuer may increase or
decrease, and additions or deletions to its securities portfolio may occur, at
any time. While it is the internal policy of the Company to limit its initial
investment in any single equity to less than 5% of its total portfolio value,
that investment could eventually exceed 5% as a result of equity appreciation
or reduction of other positions. Marketable securities are stated at market
value as determined by the most recently traded price of each security at the
balance sheet date.
As of December 31, 2003, the Company had investments in marketable equity
securities of $84,730,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
December 31, 2003.
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Electric, pipelines, oil and gas $22,015,000 26.0%
Telecommunications and media 13,653,000 16.1%
Semiconductor, software, internet,
and computer 10,286,000 12.1%
REITs, Lodging, home builders, and
Hotels 8,428,000 9.9%
Insurance and banks 7,940,000 9.4%
Apparel, food and consumer goods 5,320,000 6.3%
Chemicals, materials, metals,
and mining 5,234,000 6.2%
Pharmaceuticals and medical 5,230,000 6.2%
Airlines and defense 4,451,000 5.3%
Other 2,173,000 2.5%
---------- ------
$84,730,000 100.0%
========== ======
-16-
The following table shows the net gain or loss on the Company's marketable
securities and the associated margin interest and trading expenses for the
three and six months ended December 31, 2003 and December 31, 2002,
respectively.
Three months ended Three month ended
December 31, 2003 December 31, 2002
------------ ------------
Net gains on marketable securities $ 6,583,000 $ 578,000
Dividend & interest income 223,000 41,000
Margin interest expense (348,000) (153,000)
Trading and management expenses (1,584,000) (91,000)
------------ ------------
Investment income $ 4,874,000 $ 375,000
============ ============
Six months ended Six month ended
December 31, 2003 December 31, 2002
------------ ------------
Net gains(losses) on marketable
securities $ 8,611,000 $ (711,000)
Dividend & interest income 374,000 141,000
Margin interest expense (666,000) (196,000)
Trading and management expenses (1,788,000) (268,000)
------------ ------------
Investment income (loss) $ 6,531,000 $ (1,034,000)
============ ============
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are generated primarily from its real estate
activities, sales of investment securities and borrowings related to both.
During the six months ended December 31, 2003, the Company used net cash flow
of $922,000 from operating activities, used net cash flow of $1,790,000 from
investing activities, and generated net cash flow of $2,782,000 from financing
activities.
During the six months ended December 31, 2003, the Company made property
improvements in the aggregate amount of $803,000. Management believes the
improvements to its properties will enhance market values, maintain the
competitiveness of the Company's properties and potentially enable the Company
to obtain a higher yield through higher rents.
In July 2003, the Company refinanced a $2,141,000 real estate loan and obtained
a new $4,215,000 loan on one of its Los Angeles, California properties. The
interest rate on the loan is fixed at 4.35% for the first five years and is
adjustable through maturity on July 1, 2033.
In October 2003, the Company obtained a new mortgage loan on one of its
unencumbered properties in the amount of $525,000. The interest rate on the
loan is fixed at 5.75% for the first five years and is adjustable through
maturity on October 1, 2033.
-17-
In November 2003, the Company refinanced four mortgage loans totaling
$2,141,000 and obtained four new mortgage loans totaling $3,535,000. All four
loans share a fixed interest rate of 6.38% for the first ten years of the loan.
After ten years, the interest rate is adjustable through maturity on December
1, 2018.
The Company's Board of Directors has given the Company the authority to
repurchase, from time to time, shares of its Common Stock. Such repurchases
may be made at the discretion of management and depending on market conditions.
During the six months ended December 31, 2003, the Company purchased 20,698
shares of its stock for $252,000.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's marketable
securities are classified as trading with unrealized gains and losses recorded
through the statement of operations.
Management believes that the net cash flow generated from future operating
activities and its capital resources will be adequate to meet its current and
future obligations.
The Company has no off balance sheet arrangements. The Company also does not
have any material contractual obligations or commercial commitments.
IMPACT OF INFLATION
The Company's residential and commercial rental properties provide income from
short-term operating leases and no lease extends beyond one year. Rental
increases are expected to offset anticipated increased property operating
expenses.
Hotel room rates are typically impacted by supply and demand factors, not
inflation, since rental of a hotel room is usually for a limited number of
nights. Room rates can be, and usually are, adjusted to account for
inflationary cost increases. To the extent that the hotel lessee is able to
adjust room rates, there should be minimal impact on partnership revenues due
to inflation. Partnership revenues are also subject to interest rate risks,
which may be influenced by inflation. For the two most recent fiscal years,
the impact of inflation on the Company's income is not viewed by management as
material.
CRITICAL ACCOUNTING POLICIES
The Company reviews its long-lived assets and other investments for impairment
when circumstances indicate that a potential loss in carrying value may have
occurred. To the extent that projected future undiscounted cash flows from the
operation of the Company's hotel property, owned through the Company's
investment in Justice Investors, and rental properties are less than the
carrying value of the asset, the carrying value of the asset is reduced to its
fair value. For other investments, the Company reviews the investment's
operating results, financial position and other relevant factors to determine
whether the estimated fair value of the asset is less than the carrying value
of the asset.
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading with net unrealized gains or losses
included in earnings.
-18-
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company's Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Quarterly Report on Form 10-QSB. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed in this filing is accumulated and communicated to management and is
recorded, processed, summarized and reported in a timely manner and in
accordance with Securities and Exchange Commission rules and regulations.
(b) Internal Control Over Financial Reporting.
There have been no changes in the Company's internal control over financial
reporting during the last quarterly period covered by this Quarterly Report on
Form 10-QSB that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
(b) The Company did not file any Reports on Form 8-K - During the
quarter ended December 31, 2003.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE INTERGROUP CORPORATION
(Registrant)
Date: February 13, 2004 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: February 13, 2004 by /s/ David T. Nguyen
------------------------------
David T. Nguyen, Treasurer
and Controller
(Principal Accounting Officer)
-20-