UNITED STATES
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 March 31, 2005
[ ] 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 May 11, 2005 were 2,420,186 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 March 31, 2005 3
Consolidated Statements of Operations (unaudited)
For the Three Months Ended March 31, 2005 and 2004 4
Consolidated Statements of Operations (unaudited)
For the Nine Months Ended March 31, 2005 and 2004 5
Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended March 31, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Controls and Procedures 22
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 23
Item 4. Submission of Matters to a Vote of Shareholders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
-2-
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of March 31, 2005
-----------
ASSETS
Investment in real estate, at cost:
Land $ 29,609,000
Buildings, improvements and equipment 74,655,000
Property held for development 1,008,000
-----------
105,272,000
Less: accumulated depreciation (19,855,000)
-----------
85,417,000
Investment in Justice Investors 10,514,000
Cash and cash equivalents 2,065,000
Restricted cash 2,763,000
Investment in marketable securities 14,877,000
Prepaid expenses and other assets 4,746,000
-----------
Total assets $120,382,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable $ 80,183,000
Obligation for securities sold 2,763,000
Line of credit 6,413,000
Accounts payable and other liabilities 2,783,000
Deferred income taxes 6,971,000
-----------
Total liabilities 99,113,000
-----------
Minority interest 7,864,000
-----------
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, 2,420,186 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 12,543,000
Treasury stock, at cost, 773,559 shares (7,845,000)
-----------
Total shareholders' equity 13,405,000
-----------
Total liabilities and shareholders' equity $120,382,000
===========
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 March 31, 2005 2004
----------- -----------
Real estate operations:
Rental income $ 3,615,000 $ 2,756,000
Rental expenses:
Property operating expense (1,577,000) (1,455,000)
Mortgage interest expense (1,092,000) (841,000)
Real estate taxes (505,000) (330,000)
Depreciation (702,000) (506,000)
Amortization - intangible asset (167,000) -
----------- -----------
Loss from real estate operations (428,000) (376,000)
----------- -----------
Equity in net income(loss) of Justice Investors (509,000) 113,000
----------- -----------
Investment transactions:
Net investment gains(losses) (8,203,000) 4,174,000
Dividend and interest income 166,000 224,000
Margin interest and trading expenses (719,000) (1,346,000)
----------- -----------
Income(loss) from investment transactions (8,756,000) 3,052,000
----------- -----------
Other income(expense):
General and administrative expense (320,000) (440,000)
Other, net 18,000 37,000
----------- -----------
Other expense (302,000) (403,000)
----------- -----------
Income(loss) before provision for income
taxes and minority interest (9,995,000) 2,386,000
Provision for income tax benefit(expense) 3,999,000 (954,000)
----------- -----------
Income before minority interest (5,996,000) 1,432,000
Minority interest benefit(expense), net of tax 1,081,000 (281,000)
----------- -----------
Net income(loss) from continuing operations $ (4,915,000) $ 1,151,000
=========== ===========
Discontinued operations:
Net loss on discontinued operations $ - $ (48,000)
Gain on sale of real estate - -
Provision for income tax benefit - 19,000
----------- -----------
Loss from discontinued operations $ - $ (29,000)
=========== ===========
Net income(loss) $ (4,915,000) $ 1,122,000
=========== ===========
Income(loss) per share from continuing operations
Basic $ (2.02) $ 0.46
Diluted $ (2.02) $ 0.40
=========== ===========
Loss per share from discontinued operations
Basic $ - $ (0.01)
Diluted $ - $ (0.01)
=========== ===========
Net(loss) income per share
Basic $ (2.02) $ 0.45
Diluted $ (2.02) $ 0.39
=========== ===========
Weighted average number of shares outstanding 2,428,136 2,509,686
=========== ===========
Diluted weighted average number of shares
outstanding 2,795,636 2,842,686
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months ended March 31, 2005 2004
----------- -----------
Real estate operations:
Rental income $ 10,627,000 $ 8,102,000
Rental expenses:
Property operating expense (4,809,000) (4,321,000)
Mortgage interest expense (3,268,000) (2,447,000)
Real estate taxes (1,684,000) (949,000)
Depreciation (2,129,000) (1,543,000)
Amortization - intangible asset (500,000) -
Loss on early termination of debt (133,000) -
----------- -----------
Loss from real estate operations (1,896,000) (1,158,000)
----------- -----------
Equity in net income(loss) of Justice Investors (789,000) 557,000
----------- -----------
Investment transactions:
Net investment gains(losses) (6,125,000) 12,785,000
Impairment on other investments (258,000) -
Dividend and interest income 657,000 598,000
Margin interest and trading expenses (2,119,000) (3,800,000)
----------- -----------
Income(loss) from investment transactions (7,845,000) 9,583,000
----------- -----------
Other income(expense):
General and administrative expense (1,022,000) (1,281,000)
Other, net 112,000 99,000
----------- -----------
Other expense (910,000) (1,182,000)
----------- -----------
Income(loss) before provision for income
taxes and minority interest (11,440,000) 7,800,000
Provision for income tax benefit(expense) 4,576,000 (3,120,000)
----------- -----------
Income(loss) before minority interest (6,864,000) 4,680,000
Minority interest benefit(expense), net of tax 1,130,000 (938,000)
----------- -----------
Net income(loss) from continuing operations $ (5,734,000) $ 3,742,000
=========== ===========
Discontinued operations:
Net loss on discontinued operations $ (100,000) $ (105,000)
Gain on sale of real estate 6,006,000 -
Provision for income tax benefit(expense) (2,362,000) 42,000
----------- -----------
Income(loss) from discontinued operations $ 3,544,000 $ (63,000)
=========== ===========
Net income(loss) $ (2,190,000) $ 3,679,000
=========== ===========
Income(loss) per share from continuing operations
Basic $ (2.33) $ 1.48
Diluted $ (2.33) 1.31
=========== ===========
Income(loss) per share from discontinued operations
Basic $ 1.44 $ (0.02)
Diluted $ 1.44 $ (0.02)
=========== ===========
Net income(loss) per share
Basic $ (0.89) $ 1.46
Diluted $ (0.89) $ 1.29
=========== ===========
Weighted average number of shares outstanding 2,465,410 2,527,726
=========== ===========
Diluted weighted average number of shares
outstanding 2,832,910 2,860,726
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
THE INTEGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended March 31, 2005 2004
----------- -----------
Cash flows from operating activities:
Net income(loss) $ (2,190,000) $ 3,679,000
Adjustments to reconcile net income(loss) to
cash provided by(cash used) in operating
activities:
Depreciation of real estate 2,212,000 1,965,000
Amortization of intangible asset 500,000 -
Loss on early termination of debt 133,000 -
Impairment loss on other investments 258,000 -
Gain on sale of real estate (6,006,000) -
Net unrealized losses(gains) on investments 9,368,000 (4,422,000)
Equity in net loss(income) from Justice
Investors 789,000 (557,000)
Minority interest expense(benefit) (1,130,000) 938,000
Changes in assets and liabilities:
Restricted cash 790,000 672,000
Investment in marketable securities 41,953,000 (22,675,000)
Prepaid expenses and other assets (1,088,000) (2,848,000)
Accounts payable and other liabilities (1,687,000) (880,000)
Due to broker (22,445,000) 4,536,000
Obligation for securities sold (18,822,000) 15,639,000
Deferred income taxes (363,000) 2,300,000
----------- -----------
Net cash provided by(used in)
operating activities 2,272,000 (1,653,000)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property 11,850,000 -
Investment in real estate (1,467,000) (700,000)
Additions to buildings, improvements
and equipment (2,016,000) (1,283,000)
Distributions from Justice Investors - 874,000
Purchase of Santa Fe stock (197,000) (923,000)
----------- -----------
Net cash provided by(used in)
investing activities 8,170,000 (2,032,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 2,303,000 8,275,000
Principal payments on mortgage notes payable (11,824,000) (5,481,000)
Borrowings from line of credit 1,413,000 -
Purchase of treasury stock (1,046,000) (252,000)
Dividends paid to minority shareholders - (171,000)
----------- -----------
Net cash (used in) provided by
financing activities (9,154,000) 2,371,000
----------- -----------
Net increase(decrease) in cash and cash
equivalents 1,288,000 (1,314,000)
Cash and cash equivalents at beginning of
period 777,000 1,859,000
----------- -----------
Cash and cash equivalents at end of period $ 2,065,000 $ 545,000
=========== ===========
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, 2004 audited consolidated financial statements and notes
thereto.
As of March 31, 2005, the Company had the power to vote 76.5%, of the voting
shares of Santa Fe Financial Corporation ("Santa Fe"), a public company (OTCBB:
SFEF). Santa Fe's revenue is primarily generated through the management of its
68.9% owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), a public
company (OTCBB: PRSI), which derives its revenue primarily as a general partner
and a 49.8% limited partner in Justice Investors, a California limited
partnership ("Justice" or the "Partnership"). Justice owns the land,
improvements and leaseholds commonly known as the Holiday Inn Select Downtown &
Spa, a 565-room hotel in San Francisco, California (the "Hotel").
The results of operations for the three and nine months ended March 31, 2005
are not necessarily indicative of results to be expected for the full fiscal
year ending June 30, 2005.
Earnings Per Share
Basic earnings per share is 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 March 31, 2005, the Company
had 367,500 stock options that were considered potentially dilutive common
shares and 25,500 stock options that were considered anti-dilutive. As of
March 31, 2004, the Company had 333,000 stock options that were considered
potentially dilutive common shares and 45,000 stock options that were
considered anti-dilutive. These amounts were included in the calculation for
diluted earnings per share.
Stock-Based Compensation Plans
Effective December 15, 2002, the Company adopted Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure", which amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 148). In
accounting for its plans, the Company, as allowable under the provisions of
SFAS 148, applies Accounting Principles Board Opinions No. 25, "Accounting for
Stock issued to Employees." As a result of this election, the Company does not
recognize compensation expense for its stock option plans. During the nine
-7-
months ended March 31, 2005 and March 31, 2004, the Company granted 16,500 and
15,000 stock options, respectively. Had the Company determined compensation
cost based on the fair value for its stock options at grant date, net income
and earnings per share would have been reduced to the pro forma amounts as
follows:
Nine Months Ended Nine Months Ended
March 31, 2005 March 31, 2004
----------------- -----------------
Net income(loss) $(2,190,000) $ 3,679,000
Stock based employee
Compensation expense* (87,000) (57,000)
---------- -----------
Pro forma net income(loss) $(2,277,000) $ 3,622,000
========== ===========
Income(loss) per share
Basic as reported $ (0.89) $ 1.46
Basic pro forma $ (0.92) $ 1.43
*Determined based on the fair value method for awards net of related tax
effects (40%).
The Black-Scholes option pricing model was used with the following weighted-
average assumptions for the nine months ended March 31, 2005; risk-free
interest rate of 3.42%; dividend yield of 0%; expected Common Stock market
price volatility factor of 24.54; and a weighted-average expected life of the
options of 10 years. The weighted-average fair value of options granted during
the nine months ended March 31, 2005 was $8.78 per option. The aggregate fair
value of the options granted in during the nine months ended March 31, 2005 was
$145,000. For the nine months ended March 31, 2004, the following weighted-
average assumptions for March 31, 2004; risk-free interest rate of 2.61%;
dividend yield of 0%; expected Common Stock market price volatility factor of
36.4; and a expected life of the options of 10 years. The fair value of options
granted in during the nine months ended March 31, 2004 were $6.30 per option.
The aggregate fair value of the options granted during the nine months ended
March 31, 2004, was $95,000.
The Company is currently evaluating the impact of Financial Accounting Standard
123R,"Share-Based Payments".
2. Investment in Real Estate
In September 2004, the Company sold its 442-unit multi-family apartment complex
located in Houston, Texas for $11,850,000. The Company realized a gain of
$6,006,000 and received net proceeds of $1,364,000 after repayment of the
mortgage on the property, selling costs and attorneys' fees.
Under the provisions of the Statement of Financial Accounting Standards No.144,
Accounting for Impairment or Disposal of Long-Lived Assets, the sale of the
Houston, Texas property is required to be accounted for as a discontinued
operation. The revenues and expenses from the operation of the property have
been reclassified from continuing operations for the three and nine months
ended March 31, 2005 and 2004 and reported as income from discontinued
operations in the consolidated statements of operations. Revenues and expenses
from the operation of the property for the three and nine months ended March
31, 2005 and 2004 are summarized as follows:
-8-
For three months ended March 31, 2005 2004
---------- ----------
Revenues $ - $ 597,000
Expenses - (645,000)
---------- ----------
Net loss - (48,000)
========== ==========
For nine months ended March 31, 2005 2004
---------- ----------
Revenues $ 361,000 $ 1,794,000
Expenses (461,000) (1,899,000)
---------- ----------
Net loss (100,000) (105,000)
========== ==========
Depreciation expense for the three months ended March 31, 2005 and 2004, was $0
and $142,000, respectively. Depreciation expense for the nine months ended
March 31, 2005 and 2004, was $83,000 and $422,000, respectively.
3. Marketable Securities:
The Company's investment portfolio consists primarily of corporate equities.
The Company has also invested in corporate bonds and income producing
securities, which may include interests in real estate based companies and
REITs, where financial benefit could inure to its shareholders through income
and/or capital gain.
At March 31, 2005, all of the Company's marketable securities are classified as
trading securities. In accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the change in the unrealized gains
and losses on these investments are included earnings. Trading securities are
summarized as follows:
As of March 31, 2005
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $14,343,000 $4,364,000 ($3,830,000) $534,000 $14,877,000
Of the gross unrealized loss of $3,830,000, $3,003,000 of the loss is related
to securities held for over one year.
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 March 31, 2005, the Company had obligations for securities
sold(equities short) of $2,763,000.
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.
-9-
Included in the net losses on marketable securities of $8,203,000 for the three
months ended March 31, 2005 are net unrealized losses of $10,941,000 and net
realized gains of $2,738,000. Included in the net gains on marketable
securities of $4,174,000 for the three months ended March 31, 2004 are net
unrealized losses of $897,000 and net realized gains of $5,071,000. There were
no gross unrealized losses on any securities held which existed for more than
one year.
Included in the net losses on marketable securities of $6,125,000 for the nine
months ended March 31, 2005 are net unrealized losses of $9,368,000 and net
realized gains of $3,243,000. Included in the net gains on marketable
securities of $12,785,000 for the nine months ended March 31, 2004 are net
unrealized gains of $4,422,000 and net realized gains of $8,363,000.
4. Investment in Justice Investors:
The consolidated accounts include a 49.8% interest in Justice Investors, a
California limited partnership ("Justice" or the "Partnership"), in which
Portsmouth serves as one of the two general partners. The other general
partner, Evon Corporation ("Evon"), serves as the managing general partner.
Justice owns the land, improvements and leaseholds at 750 Kearny Street, San
Francisco, California, commonly known as the Holiday Inn Select Downtown & Spa
(the "Hotel"). Portsmouth records its investment in Justice on the equity
basis.
The Company amortizes the step up in the asset values allocable to the
depreciable assets of its investment in Justice Investors over 40 years, which
approximates the remaining life of the primary asset, the hotel building.
Historically, Justice's most significant income source was a lease between the
Partnership and Felcor Lodging Trust, Inc. ("Felcor") for the hotel portion of
the property. Pursuant to a Settlement Agreement entered into on May 3, 2004,
Felcor agreed to terminate its lease and surrender possession of the Hotel to
Justice, on June 30, 2004. Effective July 1, 2004, Justice became the owner-
operator of the Hotel, with the assistance of a Management Agreement with Dow
Hotel Company, LLC. ("Dow") to perform the day-to day management functions of
the Hotel. The Partnership also derives income from the lease of the garage
portion of the property to Evon and from a lease on the lobby level of the
Hotel to Tru Spa. The Company also derives revenue from management fees from
Justice for actively managing the hotel as a 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.
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.
In May of 2004, a $5,000,000 settlement payment was made to Justice from the
hotel lessee to resolve disputes regarding certain obligations of Felcor and
-10-
others under the terms of the Hotel Lease. That settlement payment is being
held in a separate partnership account and will be applied towards the costs of
capital repairs, replacements and improvements necessary to place the hotel in
the condition required by the Hotel Lease at the end of its term. The
Partnership expects to utilize all of the settlement proceeds for such during
fiscal 2005, which may impact the Company's equity in net income of Justice
Investors for fiscal 2005.
On December 10, 2004, Justice entered into a Franchise License Agreement for
the right to operate the Hotel property as a Hilton brand hotel. Prior to
operating the hotel as a Hilton, the Partnership is required to make
substantial renovations to the hotel to meet Hilton standards in accordance
with a product improvement plan agreed upon by Hilton and the Partnership, as
well as complying with other brand standards. The Partnership currently
estimates that the cost of the renovations will range from approximately $27
million to $28 million with an additional $3 million required for construction
interest and estimated carrying costs of operations during the transition
period. The Agreement requires that those renovations be complete and the Hotel
commence operations as a Hilton hotel no later than June 1, 2006. The term of
the Agreement is for a period of 15 years commencing on the opening date, with
an option to extend the license term for another five years, subject to certain
conditions.
On March 15, 2005, the Partnership announced its decision to close down its
Hotel operations on or about June 1, 2005 to complete renovations of the Hotel
as required by the Hilton Agreement. It is anticipated that the Hotel will be
closed for a period of six to eight months before a contemplated reopening in
the early part of 2006 as the "Hilton San Francisco Financial District". The
below ground parking garage and Tru Spa located on the lobby level of the
Hotel, both of which are lessees of the Partnership, will remain open during
the renovation work.
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
(Unaudited)
As of March 31, 2005
----------
Assets
Cash $ 1,536,000
Other current assets 1,109,000
Property, plant and equipment, net of
accumulated depreciation of $13,638,000 7,091,000
Construction in progress 4,023,000
Land 1,124,000
----------
Total assets $14,883,000
==========
Liabilities and partners' capital
Total current liabilities $ 3,087,000
Long-term debt 4,850,000
Other long-term liabilities 35,000
Partners' capital 6,911,000
----------
Total liabilities and partners' capital $14,883,000
==========
-11-
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended March 31, 2005 2004
---------- ----------
Hotel revenue $ 2,903,000 $ -
Hotel rent - 625,000
Garage rent 245,000 296,000
Other income 60,000 42,000
Operating expenses (4,067,000) (615,000)
---------- ----------
Net income(loss) $ (859,000) $ 348,000
========== ==========
For the nine months ended March 31, 2005 2004
---------- ----------
Hotel revenue $10,709,000 $ -
Hotel rent - 1,875,000
Garage rent 794,000 970,000
Other income 189,000 435,000
Operating expenses (12,916,000) (1,801,000)
---------- ----------
Net income(loss) $(1,224,000) $ 1,479,000
========== ==========
5. Mortgage Note Payable
In September 2004, the Company repaid a mortgage in the amount of $9,832,000 as
a part of the sale of its 442-unit multi-family apartment located Houston,
Texas.
In August 2004, the Company repaid a mortgage in the amount of $1,180,000 on
its 54-unit multi-family apartment located in Irving, Texas. Related to the
repayment of the mortgage, the Company incurred an early termination fee of
$133,000.
In August 2004, to facilitate the purchase of the Kihei, Maui, Hawaii property,
the Company obtained a loan in the amount of $750,000 with the balance of the
purchase price paid in cash. The loan is for a term of three years at a
floating interest rate equal to the bank's base rate (currently 4.5%) plus 1%.
Interest only is payable monthly.
6. 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.
-12-
7. 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 nine months
ended March 31, 2005 and 2004. 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 (loss) for investment transactions consist
of net investment gains(losses)and dividend and interest income.
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
March 31, 2005 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 3,615,000 $ (509,000) $(8,037,000) $ - $ (4,931,000) $ - $ (4,931,000)
Operating expenses (1,577,000) - (719,000) - (2,296,000) - (2,296,000)
Real estate taxes (505,000) - - - (505,000) - (505,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 1,533,000 (509,000) (8,756,000) - (7,732,000) - (7,732,000)
Mortgage interest expense (1,092,000) - - - (1,092,000) - (1,092,000)
Depreciation (702,000) - - - (702,000) - (702,000)
Amort. of intangible asset (167,000) - - - (167,000) - (167,000)
General and administrative
Expense - - - (320,000) (320,000) - (320,000)
Other income - - - 18,000 18,000 - 18,000
Income tax expense - - - 3,999,000 3,999,000 - 3,999,000
Minority interest - - - 1,081,000 1,081,000 - 1,081,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (428,000) $ (509,000) $(8,756,000) $ 4,778,000 $ (4,915,000) $ - $ (4,915,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $85,417,000 $10,514,000 $17,571,000 $ 6,880,000 $ 120,382,000 - $120,382,000
=========== =========== =========== =========== ============ ============ ============
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
March 31, 2004 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $ 2,756,000 $ 113,000 $ 4,398,000 $ - $ 7,267,000 $ 597,000 $ 7,864,000
Operating expenses (1,455,000) - (1,346,000) - (2,801,000) (342,000) (3,143,000)
Real estate taxes (330,000) - - - (330,000) (67,000) (397,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income 971,000 113,000 3,052,000 - 4,136,000 188,000 4,324,000
Mortgage interest expenses (841,000) - - - (841,000) (94,000) (935,000)
Depreciation (506,000) - - - (506,000) (142,000) (648,000)
General and administrative
expenses - - - (440,000) (440,000) - (440,000)
Other income - - - 37,000 37,000 - 37,000
Income tax benefit(expense) - - - (954,000) (954,000) 19,000 (935,000)
Minority interest - - - (281,000) (281,000) - (281,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (376,000) $ 113,000 $ 3,052,000 $(1,638,000) $ 1,151,000 $ (29,000) $ 1,122,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $62,988,000 $ 8,815,000 $84,646,000 $ 7,008,000 $ 163,457,000 - $163,457,000
=========== =========== =========== =========== ============ ============ ============
-13-
Real Estate
-------------------------
Nine months ended Rental Justice Investment Discontinued
March 31, 2005 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $10,627,000 $ (789,000) $(5,468,000 $ - $ 4,370,000 $ 361,000 $ 4,731,000
Operating expenses (4,809,000) - (2,377,000) - (7,186,000) (217,000) (7,403,000)
Real estate taxes (1,684,000) - - - (1,684,000) ( 47,000) (1,731,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 4,134,000 (789,000) (7,845,000) - (4,500,000) 97,000 (4,403,000)
Gain on sale of RE - - - - - 6,006,000 6,006,000
Loss on early term. of debt (133,000) - - - (133,000) - (133,000)
Mortgage interest expense (3,268,000) - - - (3,268,000) (114,000) (3,382,000)
Depreciation (2,129,000) - - - (2,129,000) (83,000) (2,212,000)
Amort. of intangible asset (500,000) - - - (500,000) - (500,000)
General and administrative
Expense - - - (1,022,000) (1,022,000) - (1,022,000)
Other income - - - 112,000 112,000 - 112,000
Income tax expense - - - 4,576,000 4,576,000 (2,362,000) 2,214,000
Minority interest - - - 1,130,000 1,130,000 - 1,130,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(1,896,000) $ (789,000) $(7,845,000) $ 4,796,000 $ (5,734,000) $ 3,544,000 $ (2,190,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $85,417,000 $10,514,000 $17,571,000 $ 6,880,000 $ 120,382,000 - $120,382,000
=========== =========== =========== =========== ============ ============ ============
Real Estate
-------------------------
Nine months ended Rental Justice Investment Discontinued
March 31, 2004 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 8,102,000 $ 557,000 $13,383,000 $ - $ 22,042,000 $ 1,794,000 $ 23,836,000
Operating expenses (4,321,000) - (3,800,000) - (8,121,000) (1,028,000) (9,149,000)
Real estate taxes (949,000) - - - (949,000) (207,000) (1,156,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 2,832,000 557,000 9,583,000 - 12,972,000 559,000 13,531,000
Mortgage interest expenses (2,447,000) - - - (2,447,000) (242,000) (2,689,000)
Depreciation (1,543,000) - - - (1,543,000) (422,000) (1,965,000)
General and administrative
expenses - - - (1,281,000) (1,281,000) - (1,281,000)
Other income - - - 99,000 99,000 - 99,000
Income tax expense - - - (3,120,000) (3,120,000) 42,000 (3,078,000)
Minority interest - - - (938,000) (938,000) - (938,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(1,158,000) $ 557,000 $ 9,583,000 $(5,240,000) $ 3,742,000 $ (63,000) $ 3,679,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $62,988,000 $ 8,815,000 $84,646,000 $ 7,008,000 $ 163,457,000 - $163,457,000
=========== =========== =========== =========== ============ ============ ============
-14-
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, interest rates, 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, 2004 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.
RECENT DEVELOPMENTS
Effective May 1, 2005, the Company entered into third party management
agreements (the "Agreements") with Morrison, Ekre & Bart Management Services,
Inc. ("MEB") for property management services for five of its Texas apartment
complexes, which are located in Austin, Irving and San Antonio. The Agreements
provide for a management fee equal to two and one-half percent of the gross
monthly receipts of each property and are for a term of two years, but can be
terminated by either party upon thirty days written notice. Should the Company
elect to terminate any of the Agreements, prior to the two year term, it would
be obligated to pay to MEB a sum equal to a one month management fee.
On March 15, 2005, the Justice Investors limited partnership "Justice
Investors" or the "Partnership") announced its decision to close down its Hotel
operations on or about June 1, 2005 to complete renovations of the Hotel as
required by the Hilton Agreement. It is anticipated that the Hotel will be
closed for a period of six to eight months before a contemplated reopening in
the early part of 2006 as the "Hilton San Francisco Financial District". The
below ground parking garage and Tru Spa located on the lobby level of the
Hotel, both of which are lessees of the Partnership, will remain open during
the renovation work.
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2005 Compared to the
Three Months Ended March 31, 2004
The Company had a net loss of $4,915,000 for the three months ended March 31,
2005 compared to net income of $1,122,000 for the three months ended March 31,
2004. As discussed below, the change was primarily due to the significant net
losses on the Company's marketable securities portfolio and the change in net
income(loss) of Justice Investors from income to a loss, partially offset by
the decrease the margin interest and trading expenses and the decrease in the
general and administrative expense.
-15-
Rental income increased to $3,615,000 for the three months ended March 31, 2005
from $2,756,000 for the three months ended March 31, 2004 primarily due to the
inclusion of rental income in the current quarter of the Company's 358-unit
apartment in Las Colinas, Texas that was acquired in April 2004. The increase
in rental income was partially offset by the reduction in rental income from
the Company's Austin and Irving, Texas properties. The reduction in rental
income from these two properties was due to higher vacancies and higher rent
concessions given to tenants as the result of the soft rental market. Property
operating expenses increased to $1,577,000 from $1,455,000 primarily as the
result of the inclusion of operating expenses related to the purchase of the
Las Colinas, Texas property in the current quarter. Mortgage interest expense
increased to $1,092,000 from $841,000 primarily due to the addition of the
$20,000,000 mortgage related to the purchase of the new property, partially
offset by the repayment of the $1,180,000 mortgage on the Irving, Texas
property. Real estate taxes and depreciation expense also increased primarily
as the result of the purchase of the Las Colinas, Texas property. The
amortization expense of $167,000 was due to the amortization of the intangible
asset acquired along with the purchase of the Las Colinas, Texas property. The
revenues and expenses of the Houston, Texas property that was sold in September
2004 were excluded from the real estate operations for the comparative quarter
and are presented under discontinued operations.
The equity in net income(loss) of Justice Investors changed to a loss of
$509,000 from income of $113,000. Effective July 1, 2004, Justice became the
owner-operator of the Hotel rather than a lessor. Thus, the Partnership net
income for the three months ended March 31, 2005 includes the direct operating
results of the Hotel, whereas in the prior year Justice received rental income
from Felcor pursuant to a lease. The net operating loss from the Hotel for the
three months ended March 31, 2005 was approximately $744,000 while the
Partnership received approximately $625,000 in rent from the Hotel lease for
the three months ended March 31, 2004. The overall decrease in Partnership net
income was primarily attributable to the net operating loss from the Hotel, a
decrease in garage rent to $245,000 from 296,000 and increased costs in the
current quarter related to professional fees and other costs for the
repositioning of the Hotel
Average daily room rates for the Hotel decreased to approximately $85 for the
three months ended March 31, 2005, compared to approximately $91 for the three
months ended March 31, 2004, while average occupancy rates remained relatively
flat at approximately 60%. Those results primarily reflect the inability of the
Hotel to currently meet its competition. The Hotel is facing more competition
from new properties and from higher end properties that provide greater
amenities to its guests, especially for the business traveler. The Partnership
is committed to making the Hotel competitive in its market by undertaking a
significant renovation of the property and entering into a new Franchise
License Agreement to operate the Hotel as a Hilton Brand hotel after the
renovation is complete. In addition, the hotel business in the San Francisco
Bay Area has lagged behind the recovery seen in other major cities in the
United States due to the continued weakness in the local economy and a decline
in international travel.
Net investment gains(losses) on marketable securities changed to net losses of
$8,203,000 for the three months ended March 31, 2005 from a net gains of
$4,174,000 for the three months ended March 31, 2004. A significant portion of
the losses in the current quarter was attributable to holdings in a company in
the Pharmaceutical and Medical industry group whose stock significantly
declined after one of its major drugs was unexpectedly pulled from the market.
For the three months ended March 31, 2005, the Company had net unrealized
losses of $10,941,000 and net realized gains of $2,738,000. For the three
months ended March 31, 2004, the Company had net unrealized losses of $897,000
and net realized gains of $5,071,000. Gains and losses on marketable
securities may fluctuate significantly from period to period in the future and
could have a significant
-16-
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 decreased to $166,000 from $224,000 as the result
of the reduction in the investment in dividend-yielding securities.
Margin interest and trading expenses decreased to $719,000 from $1,346,000
primarily due to a $757,000 performance-based compensation earned by the
Company's CEO for his management of the Company's investment portfolio for the
three months ended March 31, 2004. There was no such bonus earned by the
Company's CEO for the three months ended March 31, 2005. Trading expenses also
decreased to $406,000 from $787,000 as the result of the reduction of staff and
the reduction of trading related expenses. The remaining difference is related
to the decrease in margin interest expense to $313,000 from $388,000.
General and administrative expenses decreased to $320,000 from $440,000
primarily to due to the reduction of annual corporate tax preparation fees to
$30,000 from $120,000 and the reduction of administrative staff. Management
continues to make efforts to reduce general and administrative expenses across
the board.
The provision for the income tax benefit(expense) changed to a benefit of
$3,999,000 for the three months ended March 31, 2005 from an expense of
$954,000 for the three months ended March 31, 2004 primarily due to the
significant losses incurred during the current quarter.
Minority interest benefit(expense) changed to a benefit of $1,081,000 from an
expense of $281,000 due to the significant losses incurred by the Company's
subsidiary, Santa Fe, in the current quarter.
For the Nine Months Ended March 31, 2005 Compared to the
Nine Months Ended March 31, 2004
The Company had a net loss of $2,190,000 for the three months ended March 31,
2005 compared to net income of $3,679,000 for the three months ended March 31,
2004. As discussed below, the change was primarily due to the significant net
losses on the Company's marketable securities portfolio, the increase in the
loss from real estate operations and the change in net income(loss) of Justice
Investors from income to a loss, partially offset by the gain on sale of real
estate, the decrease the margin interest and trading expenses and the decrease
in the general and administrative expense.
Rental income increased to $10,627,000 for the nine months ended March 31, 2005
from $8,102,000 for the nine months ended March 31, 2004 primarily due to the
inclusion of rental income in the nine months ended March 31, 2005 of the
Company's 358-unit apartment in Las Colinas, Texas that was acquired in April
2004. The increase in rental income was partially offset by the reduction in
rental income from the Company's Austin and Irving, Texas properties. The
reduction in rental income from these two properties was due to higher
vacancies and higher rent concessions given to tenants as the result of the
soft rental market. Property operating expenses increased to $4,809,000 from
$4,321,000 as the result of the inclusion of operating expenses related to the
newly acquired property in the nine months ended March 31, 2005. Mortgage
-17-
interest expense increased to $3,268,000 from $2,447,000 primarily due to the
addition of a $20,000,000 mortgage related to the purchase of the Las Colinas,
Texas property, partially offset by the repayment of the $1,180,000 mortgage on
the Irving, Texas property. Real estate taxes and depreciation expense also
increased primarily as the result of the purchase of the Las Colinas, Texas
property. The amortization expense of $500,000 was due to the amortization of
the intangible asset acquired along with the purchase of the Las Colinas, Texas
property. The revenues and expenses of the Houston, Texas property that was
sold in September 2004 were excluded from the real estate operations for the
nine months ended March 31, 2005 and 2004 and are presented under discontinued
operations.
The Company incurred a loss on early termination of debt in the amount of
$133,000 as the result of the repayment of the $1,180,000 mortgage on its
property located in Irving, Texas in August 2004.
In September 2004, the Company sold its 442-unit multi-family apartment complex
located in Houston, Texas for $11,850,000. The Company realized a gain of
$6,006,000 on the sale. The gain on the sale on this property and its
operating results for the nine months ended March 31, 2005 and 2004 are
reported under discontinued operations on the Statement of Operations.
The equity in net income(loss) of Justice Investors changed to a loss of
$789,000 from income of $557,000. Effective July 1, 2004, Justice became the
owner-operator of the Hotel rather than a lessor. Thus, the Partnership net
income for the first nine months of fiscal 2005 includes the direct operating
results of the Hotel, whereas in the prior year Justice received rental income
from Felcor pursuant to a lease. The net operating loss from the Hotel for the
nine months ended March 31, 2005 was approximately $929,000, while the
Partnership received approximately $1,875,000 in rent from the Hotel lease for
the nine months ended March 31, 2004. The overall decrease in Partnership net
income was primarily attributable to the net operating loss from the Hotel, a
decrease in garage rent to $794,000 from $970,000 and increased costs in
related to professional fees and other costs for the repositioning of the
Hotel.
Average daily room rates for the Hotel decreased to approximately $89 for the
nine months ended March 31, 2005, compared to approximately $91 for the nine
months ended March 31, 2004, while average monthly occupancy rates decreased to
approximately 64.6% compared to approximately 68% in the prior year. Those
results primarily reflect the inability of the Hotel to currently meet its
competition. The Hotel is facing more competition from new properties and
from higher end properties that provide greater amenities to its guests,
especially for the business traveler. The Partnership is committed to making
the Hotel competitive in its market by undertaking a significant renovation of
the property and by entering into a new Franchise License Agreement to operate
the Hotel as a Hilton Brand hotel after the renovation is complete. In
addition, the hotel business in the San Francisco Bay Area has lagged behind
the recovery seen in other major cities in the United States due to the
continued weakness in the local economy and a decline in international travel.
Net investment gains(losses) on marketable securities changed to net losses of
$6,125,000 for the nine months ended March 31, 2005 from net gains of
$12,785,000 for the nine months ended March 31, 2004. A significant portion of
the losses was attributable to holdings in a company in the Pharmaceutical and
Medical industry group whose stock significantly declined after one of its
major drugs was unexpectedly pulled from the market. For the nine months ended
March 31, 2005, the Company had net unrealized losses of $9,368,000 and net
realized gains of $3,243,000. For the nine months ended March 31, 2004, the
Company had net unrealized gains of $4,422,000 and net realized gains of
$8,363,000. Gains and losses on marketable securities may fluctuate
-18-
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.
During the nine months ended March 31, 2005, the Company recorded an impairment
loss of $258,000 related to a private placement investment.
Margin interest and trading expenses decreased to $2,119,000 from $3,800,000
primarily due to the decrease in the performance-based compensation earned by
the Company's CEO for his management of the Company's investment portfolio to
$320,000 for the nine months ended March 31, 2005 from $1,949,000 for the nine
months ended March 31, 2004.
General and administrative expenses decreased to $1,022,000 from $1,281,000
primarily to due to the reduction of annual corporate tax preparation fees to
$30,000 from $120,000 and the reduction of administrative staff. Management
continues to make efforts to reduce general and administrative expenses across
the board.
The provision for income tax benefit(expense) changed to a tax benefit of
$2,214,000 from a tax expense of $3,078,000 primarily due to the significant
losses incurred in the nine months ended March 31, 2005.
Minority interest benefit(expense) changed to a benefit of $1,130,000 from an
expense of $938,000 as a result of the significant loss incurred by the
Company's subsidiary, Santa Fe during the nine months ended March 31, 2005.
MARKETABLE SECURITIES
The Company's investment portfolio is diversified with 54 different equity
positions. Only three equity securities are more than 5% of the equity value
of the portfolio, with the largest being 18.2%. 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 March 31, 2005, the Company had investments in marketable equity
securities of $14,877,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
March 31, 2005.
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Banks and insurance $ 3,848,000 25.9%
Real estate investment trusts 3,786,000 25.4%
Electric, pipelines, oil and gas 2,555,000 17.2%
Apparel, food and consumer goods 2,046,000 13.8%
Telecommunications and media 1,661,000 11.2%
Pharmaceutical and medical 374,000 2.5%
Other 607,000 4.0%
---------- ------
$14,877,000 100.0%
========== ======
-19-
The following table shows the investment income or loss on the Company's
marketable securities and the associated margin interest and trading expenses
for the three and nine months ended March 31, 2005 and 2004, respectively.
Three months ended Three months ended
March 31, 2005 March 31, 2004
------------------ ------------------
Net gains(losses) on marketable
securities $ (8,203,000) $ 4,174,000
Dividend & interest income 166,000 224,000
Margin interest expense (313,000) (388,000)
Trading and management expenses (406,000) (958,000)
------------ ------------
Investment income(loss) $ (8,756,000) $ 3,052,000
============ ============
Nine months ended Nine months ended
March 31, 2005 March 31, 2004
----------------- -----------------
Net gains(losses) on marketable
securities $ (6,125,000) $ 12,785,000
Impairment loss on other invest. (258,000) -
Dividend & interest income 657,000 598,000
Margin interest expense (774,000) (1,054,000)
Trading and management expenses (1,345,000) (2,746,000)
------------ ------------
Investment income(loss) $ (7,845,000) $ 9,583,000
============ ============
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 nine months ended March 31, 2005, operating activities generated
cash of $2,272,000, investing activities provided cash of $8,170,000 and
financing activities used cash of $9,154,000.
During the nine months ended March 31, 2005, the Company made property
improvements in the aggregate amount of $2,016,000. 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 September 2004, the Company sold its 442-unit multi-family apartment complex
located in Houston, Texas for $11,850,000. The Company realized a gain of
$6,006,000 and received net proceeds of $1,364,000 after repayment of the
mortgage of $9,832,000 on the property, selling costs and attorneys' fees.
In August 2004, the Company repaid the mortgage in the amount of $1,180,000 on
its 54-unit multi-family apartment located in Irving, Texas. Related to the
repayment of the mortgage, the Company incurred an early termination fee of
$133,000.
In August 2004, the Company purchased an approximately two acre parcel of
unimproved land in Kihei, Maui, Hawaii for $1,450,000. The land will be held
for sale or development. To facilitate the purchase of the property, the
Company obtained a loan in the amount of $750,000 with the balance of the
purchase price paid in cash. The loan is for a term of three years at a
floating interest rate equal to the bank's base rate (currently 4.5%) plus 1%.
Interest only is payable monthly.
-20-
As discussed above, Justice Investors has decided to close down its Hotel
operations on or about June 1, 2005 to complete the renovations of the Hotel as
required by the Hilton Agreement. The Partnership currently estimates that the
actual cost of the renovations will be approximately $27 million to $28 million
with an additional $3 million required for construction interest and estimated
carrying costs of operations. It is anticipated that the Hotel will be closed
for a period of six to eight months before a contemplated reopening as the
"Hilton San Francisco Financial District" in the early part of 2006. The below
ground parking garage and Tru Spa located on the lobby level of the Hotel, both
of which are lessees of the Partnership, will remain open during the renovation
work. During that transition period, income from the Hotel will be limited to
rental income and the Partnership is expected incur losses during that time.
Due to the losses from the operations of the Hotel expected during the
transition period, and the substantial financial commitments the Partnership
will have to make for the renovations, Justice discontinued Partnership
distributions effective April 2004. Justice does not anticipate paying any
further Partnership distributions until some time after operations commence
under the Hilton brand and net income and capital requirements warrant such
distributions.
To meet its substantial financial commitments, the Partnership will have to
rely on additional borrowings to meet its obligations. Justice Investors
believes that the value of the Hotel property will be adequate to serve as
collateral to secure the necessary financing. That amount of leverage and the
associated debt service will create additional risk for the Partnership and its
ability to generate cash flows in the future since the Hotel asset has been
virtually debt free for many years. Although the Partnership is not expected
to see a significant improvement in cash flows until sometime in 2006, it
believes that the renovations to the Hotel, the new management structure and a
new brand will make the Hotel more competitive in the future.
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 nine months ended March 31, 2005, the Company purchased 76,500
shares of its stock for $1,046,000.
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.
OFF-BALANCE SHEET ARRANGEMENTS
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.
-21-
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.
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.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
(c) Purchases of equity securities by the small business issuer and affiliated
purchasers.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(c)Total Number (d)Maximum Number
(a)Total (b) of Shares Purchased of Shares that May
Number of Average as Part of Publicly Yet Be Purchased
2005 Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
--------------------------------------------------------------------------------------
Month #1
(Jan. 1- 6,500 $15.00 6,500 106,441
Jan. 31)
--------------------------------------------------------------------------------------
Month #2
(Feb. 1- - - - 106,441
Feb. 28)
--------------------------------------------------------------------------------------
Month #3
(Mar. 1- 10,000 $14.52 10,000 96,441
Mar. 31)
--------------------------------------------------------------------------------------
Total 16,500 $14.71 16,500 96,441
--------------------------------------------------------------------------------------
The Company currently has only one stock repurchase program. The program was
initially announced on January 13, 1998 and was first amended on February 10,
2003. The total number of shares authorized to be repurchased was 720,000,
adjusted for stock splits. On October 12, 2004, the Board of Directors
authorized the Company to purchase up to an additional 150,000 shares of
Company's common stock, increasing the total remaining number of shares
authorized for repurchase to 152,941. The program has no expiration date and
can be amended from time to time in the discretion of the Board of Directors.
No plan or program expired during the period covered by the table.
Item 4. Submission of Matters to a Vote of Shareholders.
The Annual Meeting of the Shareholders of the Company was held on February 23,
2005 at the Luxe Summit Hotel Bel-Air, 11461 Sunset Blvd., Los Angeles,
California 90049. At that meeting, two Class B Directors, Gary N. Jacobs and
William J. Nance, were elected to serve a three year term expiring at the
Fiscal 2007 Annual Meeting. Each nominee received in excess of 99% of the
shares voted. John V. Winfield, Josef A. Grunwald, John C. Love, and Mildred
Bond Roxborough continue their terms as the Company's other directors. At the
Annual Meeting, the shareholders also voted in favor of the ratification of the
Audit Committee's selection of PricewaterhouseCoopers LLP as the independent
auditors of the Company for the fiscal year ending June 30, 2005. A tabulation
of the vote follows:
-23-
Proposal (1) - Directors: Votes For Withheld
--------- --------
Gary N. Jacobs 2,253,382 17,397
William J. Nance 2,263,188 7,591
Proposal (2) - Accountants: Votes For Against Abstained
--------- ------- ---------
PricewaterhouseCoopers LLP 2,265,484 334 4,961
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) Registrant did not file any reports on Form 8-K during the quarter
covered by this Report:
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: May 12, 2005 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 12, 2005 by /s/ David T. Nguyen
------------------------------
David T. Nguyen, Treasurer
and Controller
(Principal Accounting Officer)
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