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 December 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of February 8, 2006 were 2,397,241 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, 2005 3
Consolidated Statements of Operations (unaudited)
For the Three Months Ended December 31, 2005 and 2004 4
Consolidated Statements of Operations (unaudited)
For the Six Months Ended December 31, 2005 and 2004 5
Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended December 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 15
Item 3. Controls and Procedures 23
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of December 31, 2005
-----------
ASSETS
Investment in real estate, at cost:
Land $ 26,649,000
Buildings, improvements and equipment 72,870,000
Less: accumulated depreciation (21,252,000)
-----------
78,267,000
Property held for sale or development 1,026,000
-----------
79,293,000
Cash and cash equivalents 596,000
Restricted cash 3,108,000
Investment in marketable securities 32,242,000
Prepaid expenses and other assets 6,414,000
Investment in Justice Investors 7,990,000
-----------
Total assets $129,643,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable $ 77,208,000
Due to securities broker 12,863,000
Obligation for securities sold 6,413,000
Line of credit 6,058,000
Accounts payable and other liabilities 4,197,000
Deferred income taxes 6,300,000
-----------
Total liabilities 113,039,000
-----------
Minority interest 6,053,000
-----------
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, 2,397,241 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 10,058,000
Treasury stock, at cost, 796,504 shares (8,214,000)
-----------
Total shareholders' equity 10,551,000
-----------
Total liabilities and shareholders' equity $129,643,000
===========
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, 2005 2004
----------- -----------
Real estate operations:
Rental income $ 3,290,000 $ 3,263,000
Rental expenses:
Property operating expense (1,946,000) (1,519,000)
Mortgage interest expense (1,019,000) (1,026,000)
Real estate taxes (478,000) (733,000)
Depreciation (637,000) (666,000)
Amortization - intangible asset - (166,000)
----------- -----------
Loss from real estate operations (790,000) (847,000)
----------- -----------
Equity in net loss of Justice Investors (1,071,000) (357,000)
----------- -----------
Investment transactions:
Net investment gains 1,307,000 6,705,000
Impairment loss on other investments (241,000) (258,000)
Dividend and interest income 122,000 199,000
Margin interest and trading expenses (590,000) (824,000)
----------- -----------
Income from investment transactions 598,000 5,822,000
----------- -----------
Other income(expense):
General and administrative expense (469,000) (321,000)
Other, net (183,000) 8,000
----------- -----------
Other expense (652,000) (313,000)
----------- -----------
Income(loss) before provision for income taxes and
minority interest (1,915,000) 4,305,000
Provision for income tax benefit(expense) 722,000 (1,723,000)
----------- -----------
Income(loss) before minority interest (1,193,000) 2,582,000
Minority interest benefit(expense), net of tax 193,000 (596,000)
----------- -----------
Net income(loss) from continuing operations $ (1,000,000) $ 1,986,000
----------- -----------
Discontinued operations:
Net loss on discontinued operations $ (31,000) $ (99,000)
Gain(loss) on sale of real estate 1,185,000 -
Provision for income tax benefit(expense) (439,000) 40,000
----------- -----------
Income(loss) from discontinued operations $ 715,000 $ (59,000)
----------- -----------
Net income(loss) $ (285,000) $ 1,927,000
=========== ===========
Income(loss) per share from continuing operations
Basic $ (0.42) $ 0.80
Diluted $ (0.42) $ 0.70
=========== ===========
Income(loss) per share from discontinued operations
Basic $ 0.30 $ (0.02)
Diluted $ 0.26 $ (0.02)
=========== ===========
Income(loss) per share
Basic $ (0.12) $ 0.78
Diluted $ (0.12) $ 0.68
=========== ===========
Weighted average number of shares outstanding 2,397,241 2,470,532
=========== ===========
Diluted weighted average number of shares
outstanding 2,764,741 2,838,032
=========== ===========
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, 2005 2004
----------- -----------
Real estate operations:
Rental income $ 6,654,000 $ 6,535,000
Rental expenses:
Property operating expense (3,631,000) (2,907,000)
Mortgage interest expense (2,038,000) (1,881,000)
Real estate taxes (963,000) (1,108,000)
Depreciation (1,308,000) (1,337,000)
Amortization - intangible asset - (333,000)
Loss on early termination of debt - (133,000)
----------- -----------
Loss from real estate operations (1,286,000) (1,164,000)
----------- -----------
Equity in net loss of Justice Investors (1,858,000) (280,000)
----------- -----------
Investment transactions:
Net investment gains 1,296,000 2,078,000
Impairment loss on other investments (299,000) (258,000)
Dividend and interest income 424,000 491,000
Margin interest and trading expenses (1,150,000) (1,400,000)
----------- -----------
Income from investment transactions 271,000 911,000
----------- -----------
Other income(expense):
General and administrative expense (807,000) (702,000)
Other, net (170,000) 94,000
----------- -----------
Other expense (977,000) (608,000)
----------- -----------
Loss before provision for income taxes and
minority interest (3,850,000) (1,141,000)
Provision for income tax benefit 1,464,000 456,000
----------- -----------
Loss before minority interest (2,386,000) (685,000)
Minority interest benefit, net of tax 514,000 49,000
----------- -----------
Net loss from continuing operations $ (1,872,000) $ (636,000)
----------- -----------
Discontinued operations:
Net loss on discontinued operations $ (101,000) $ (404,000)
Gain(loss) on sale of real estate 1,161,000 6,006,000
Provision for income tax benefit(expense) (403,000) (2,241,000)
----------- -----------
Income from discontinued operations $ 657,000 $ 3,361,000
----------- -----------
Net income(loss) $ (1,215,000) $ 2,725,000
=========== ===========
Loss per share from continuing operations
Basic $ (0.78) $ (0.26)
Diluted $ (0.78) $ (0.26)
=========== ===========
Income per share from discontinued operations
Basic $ 0.27 $ 1.35
Diluted $ 0.24 $ 1.18
=========== ===========
Income(loss) per share
Basic $ (0.51) $ 1.10
Diluted $ (0.51) $ 0.96
=========== ===========
Weighted average number of shares outstanding 2,400,216 2,483,751
=========== ===========
Diluted weighted average number of shares
outstanding 2,767,716 2,851,251
=========== ===========
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, 2005 2004
----------- -----------
Cash flows from operating activities:
Net income(loss) $ (1,215,000) $ 2,725,000
Adjustments to reconcile net income(loss) to
cash provided by(cash used) in operating
activities:
Depreciation of real estate 1,308,000 1,337,000
Depreciation (discontinued operations) 17,000 173,000
Amortization of intangible asset - 333,000
Loss on early termination of debt - 133,000
Impairment loss on other investments 299,000 258,000
Gain on sale of real estate (1,161,000) (6,006,000)
Net unrealized gains on investments (1,419,000) (1,573,000)
Equity in net loss from Justice Investors 1,858,000 280,000
Minority interest benefit (514,000) (49,000)
Changes in assets and liabilities:
Restricted cash (127,000) 157,000
Investment in marketable securities (6,789,000) 1,366,000
Prepaid expenses and other assets (2,678,000) 698,000
Accounts payable and other liabilities 686,000 971,000
Due to broker 6,137,000 4,428,000
Obligation for securities sold 1,156,000 (6,290,000)
Deferred income taxes - 1,462,000
----------- -----------
Net cash provided by(used in)
operating activities (2,442,000) 403,000
----------- -----------
Cash flows from investing activities:
Net proceeds from sale of real estate 8,240,000 11,850,000
Investment in real estate - (1,467,000)
Additions to buildings, improvements
and equipment (1,831,000) (1,813,000)
Purchase of Santa Fe stock (125,000) -
Purchase of Portsmouth stock (260,000) (44,000)
----------- -----------
Net cash provided by investing activities 6,024,000 8,526,000
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable - 1,675,000
Principal payments on mortgage notes payable (3,224,000) (10,986,000)
Borrowings from (paydown of) line of credit (255,000) 1,413,000
Purchase of treasury stock (375,000) (803,000)
----------- -----------
Net cash used in financing activities (3,854,000) (8,701,000)
----------- -----------
Net increase(decrease) in cash and cash
equivalents (272,000) 228,000
Cash and cash equivalents at beginning of
period 868,000 777,000
----------- -----------
Cash and cash equivalents at end of period $ 596,000 $ 1,005,000
=========== ===========
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, 2005 audited consolidated financial statements and notes
thereto.
As of December 31, 2005, the Company had the power to vote 78%, 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
68.8% 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 now known as the Hilton San Francisco Financial
District, a 549-room hotel in San Francisco, California (the "Hotel"). Both
Santa Fe and Portsmouth are consolidated into the Company's financial
statements.
The results of operations for the three and six months ended December 31, 2005
are not necessarily indicative of results to be expected for the full fiscal
year ending June 30, 2006.
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 December 31, 2005, the Company
had 367,500 stock options that were considered potentially dilutive common
shares and 37,500 stock options that were considered anti-dilutive. As of
December 31, 2004, the Company had 367,500 stock options that were considered
potentially dilutive common shares and 25,500 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 six
-7-
months ended December 31, 2005 and December 31, 2004, the Company granted
12,000 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(loss) and earnings(loss) per share would have been reduced to the
pro forma amounts as follows:
For the six months ended December 31, 2005 2004
------------ -----------
Net income(loss) $(1,215,000) $ 2,725,000
Stock based employee
Compensation expense* (44,000) (68,000)
------------ -----------
Pro forma net income(loss) $(1,259,000) $ 2,657,000
============ ===========
Earnings(loss) per share
Basic as reported $ (0.51) $ 1.10
Basic pro forma $ (0.52) $ 1.07
Diluted as reported $ (0.51) $ 0.96
Diluted pro forma $ (0.52) $ 0.93
*Determined based on the fair value method for awards net of related tax
effects (38%).
The Black-Scholes option pricing model was used with the following weighted-
average assumptions for the six months ended December 31, 2005; risk-free
interest rate of 4.49%; dividend yield of 0%; expected Common Stock market
price volatility factor of 19.95; and a weighted-average expected life of the
options of 10 years. The weighted-average fair value of options granted during
the six months ended December 31, 2005 was $6.18 per option. The aggregate
fair value of the options granted in during the six months ended December 31,
2005 was $74,000. For the six months ended December 31, 2004, the following
weighted-average assumptions for December 31, 2004; risk-free interest rate of
3.01%; dividend yield of 0%; expected Common Stock market price volatility
factor of 25.89; and a expected life of the options of 10 years. The fair value
of options granted in during the six months ended December 31, 2004 were $6.93
per option. The aggregate fair value of the options granted during the three
months ended December 31, 2004, was $114,000.
The Company is currently evaluating the impact of Financial Accounting Standard
123R, "Share-Based Payments"(FAS 123R). FAS 123R requires companies to
recognize compensation expense equal to the fair value of stock options or
other share-based payments.
2. Investment in Real Estate
In December 2005, the Company sold its 54-unit apartment complex located in
Irving, Texas for $3,100,000 and realized a gain on the sale of real estate of
$598,000. The Company received net proceeds of $2,931,000 after selling costs
and attorney's fees.
In November 2005, the Company sold its 5-unit apartment complex located in Los
Angeles, California for $1,620,000 and realized a gain on the sale of real
estate of $587,000. The Company received net proceeds of $870,000 after
selling costs and attorney's fees and the repayment of the mortgage note in the
amount of $660,000.
In August 2005, the Company sold its 112-unit apartment complex located in
Austin, Texas for $4,400,000 and realized a net loss on the sale real estate of
$24,000. The Company received net proceeds of $1,664,000 after selling costs
and attorney's fees and the repayment of the mortgage note in the amount of
$2,186,000.
-8-
Under the provisions of the Statement of Financial Accounting Standards No.144,
Accounting for Impairment or Disposal of Long-Lived Assets, for properties
disposed of during the year, the revenues and expenses are accounted for under
discontinued operations in the statement of operations. The revenues and
expenses from the operation of these properties have been reclassified from
continuing operations for the three and six months ended December 31, 2005 and
2004 and reported as income from discontinued operations in the consolidated
statements of operations.
During the three and six months ended December 31, 2005, the Company sold
three properties. The revenues and expenses from the operation of these three
properties for the three months and six ended December 31, 2005 and 2004 are
summarized as follows:
For the three months ended December 31, 2005 2004
---------- ----------
Revenues $ 35,000 $ 245,000
Expenses (66,000) (344,000)
---------- ----------
Net loss (31,000) (99,000)
========== ==========
Depreciation expense for the three months ended December 31, 2005 and 2004, was
$0 and $45,000, respectively.
For the six months ended December 31, 2005 2004
---------- ----------
Revenues $ 153,000 $ 838,000
Expenses (254,000) (1,242,000)
---------- ----------
Net loss (101,000) (404,000)
========== ==========
Depreciation expense for the six months ended December 31, 2005 and 2004, was
$17,000 and $173,000, 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 December 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 December 31, 2005
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $28,845,000 $5,107,000 ($1,710,000) $3,397,000 $32,242,000
Of the cumulative gross unrealized loss of $1,710,000, $537,000 of the loss is
related to securities held for over one year.
-9-
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, 2005, the Company had obligations for securities
sold (equities short) of $6,413,000.
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.
Net gains on marketable securities on the statement of operations are comprised
of realized and unrealized gains. Below is the composition of the two
components for the three and six months ended December 31, 2005 and 2004,
respectively.
For the three months ended December 31, 2005 2004
----------- -----------
Realized gain on marketable securities $ 58,000 $ 381,000
Unrealized gain on marketable securities 1,249,000 6,324,000
----------- -----------
Net gains on marketable securities 1,307,000 $ 6,705,000
=========== ===========
For the six months ended December 31, 2005 2004
----------- -----------
Realized gain(loss) on marketable securities $ (123,000) $ 505,000
Unrealized gain on marketable securities 1,419,000 1,573,000
----------- -----------
Net gains on marketable securities 1,296,000 $ 2,078,000
=========== ===========
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, formerly known as the Holiday Inn Select Downtown & Spa
(the "Hotel"). Portsmouth records its investment in Justice on the equity
basis. The Company's investment in Justice is recorded on the equity basis.
The Company amortizes the step up in the asset values which represents the
excess purchase price over the underlying book value and is allocable to the
depreciable assets of its investment in Justice over 40 years, which
approximates the remaining life of the primary asset, the hotel building.
As a general and limited partner, Portsmouth has significant control over the
management and operation of the assets of Justice. 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.
-10-
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.
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.
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 was 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 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.
The Partnership currently estimates that the total cost of the renovation
project will be approximately $41 million. That amount includes approximately
$35 million for the actual cost of the renovations and approximately $6 million
for construction interest and estimated carrying costs of operations during the
renovation period and for the first couple of months of operations after the
hotel opens. As of December 31, 2005, the Partnership has incurred
approximately $31,578,000 in construction costs related to the renovation. Of
that amount, approximately $636,000 is related to capitalized interest.
Additionally, for the six months ended December 31, 2005, the Partnership had
an operating loss of approximately $3,491,000.
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. The below ground parking garage and Tru
Spa located on the lobby level of the Hotel, both of which are lessees of the
Partnership, remained open during the renovation work. The Hotel renovation
work was substantially completed on January 12, 2006 at which time the
Partnership obtained approval from Hilton to open the Hotel as the "Hilton San
Francisco Financial District". The Hotel opened with a limited number of rooms
available to rent, which number has increased as the Hotel transitions into
full operations and all of the guest rooms, suites and amenities are completed.
It is expected that project will be totally finished in February 2006.
-11-
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
(Unaudited)
As of December 31, 2005
----------
Assets
Cash $ 7,474,000
Other assets 2,518,000
Property, plant and equipment, net of
accumulated depreciation of $13,494,000 3,981,000
Construction in progress 31,578,000
Land 1,124,000
----------
Total assets $ 46,675,000
==========
Liabilities and partners' capital
Total current liabilities $ 9,473,000
Long-term debt 36,779,000
Partners' capital 423,000
----------
Total liabilities and partners' capital $ 46,675,000
==========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended December 31, 2005 2004
---------- ----------
Hotel revenue $ - $ 3,452,000
Hotel rent - -
Garage rent 168,000 244,000
Other income(loss) (488,000) 69,000
Operating expenses (1,711,000) (4,406,000)
---------- ----------
Net loss $ (2,031,000) $ (641,000)
========== ==========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the six months ended December 31, 2005 2004
---------- ----------
Hotel revenue $ - $ 7,806,000
Hotel rent - -
Garage rent 325,000 549,000
Other income(loss) (465,000) 129,000
Operating expenses (3,351,000) (8,849,000)
---------- ----------
Net loss $ (3,491,000) $ (365,000)
========== ==========
-12-
5. Mortgage Note Payable
In May 2004, the Company obtained a construction loan in the amount of
$6,268,000 as part of a major renovation of its 30-unit apartment complex
located in Los Angeles, California. In December 2005, the Company entered into
a loan modification agreement with the bank and increased the loan amount to
$7,286,000. As of December 31, 2005, the balance on the construction loan was
$3,381,000.
In November 2005, the Company paid off a mortgage in the amount of $660,000
related to the sale of its 5-unit family apartment located Los Angeles,
California.
In August 2005, the Company paid off a mortgage in the amount of $2,186,000
related to the sale of its 112-unit multi-family apartment located Austin,
Texas.
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.
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 six months
ended December 31, 2005 and 2004. Operating income(loss) for rental properties
consists of rental income. Operating income(loss) 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
December 31, 2005 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 3,290,000 $(1,071,000) $ 1,188,000 $ - $ 3,407,000 $ 35,000 $ 3,442,000
Operating expenses (1,946,000) - (590,000) - (2,536,000) (30,000) (2,566,000)
Real estate taxes (478,000) - - - (478,000) (14,000) (492,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 866,000 (1,071,000) 598,000 - 393,000 (9,000) 384,000
Mortgage interest expense (1,019,000) - - - (1,019,000) - (1,041,000)
Depreciation (637,000) - - - (637,000) (22,000) (637,000)
Gain on sale of real estate - - - - - 1,185,000 1,185,000
General and administrative
Expense - - - (469,000) (469,000) - (469,000)
Other income - - - (183,000) (183,000) - (183,000)
Income tax benefit - - - 722,000 722,000 (439,000) 283,000
Minority interest benefit - - - 193,000 193,000 - 193,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (790,000) (1,071,000) $ 598,000 $ 263,000 $ (1,000,000) $ 715,000 $ (285,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $79,293,000 $ 7,991,000 $32,242,000 $10,118,000 $ 129,644,000 - $129,644,000
=========== =========== =========== =========== ============ ============ ============
-13-
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
December 31, 2004 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 3,263,000 $ (357,000) $ 6,646,000 $ - $ 9,552,000 $ 245,000 $ 9,797,000
Operating expenses (1,519,000) - (824,000) - (2,343,000) (180,000) (2,523,000)
Real estate taxes (733,000) - - - (733,000) (34,000) (767,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 1,011,000 (357,000) 5,822,000 - 6,476,000 31,000 6,507,000
Mortgage interest expenses (1,026,000) - - - (1,026,000) (85,000) (1,111,000)
Depreciation (666,000) - - - (666,000) (45,000) (711,000)
Amort. of intangible asset (166,000) - - - (166,000) - (166,000)
General and administrative
expenses - - - (321,000) (321,000) - (321,000)
Other income - - - 8,000 8,000 - 8,000
Income tax expense - - - (1,723,000) (1,723,000) 40,000 (1,683,000)
Minority interest - - - (596,000) (596,000) - (596,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (847,000) $ (357,000) $ 5,822,000 $(2,632,000) $ 1,986,000 $ (59,000) $ 1,927,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $85,916,000 $11,048,000 $68,118,000 $ 5,935,000 $ 171,017,000 - $171,017,000
=========== =========== =========== =========== ============ ============ ============
Real Estate
-------------------------
Six months ended Rental Justice Investment Discontinued
December 31, 2005 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 6,654,000 $(1,858,000) $ 1,421,000 $ - $ 6,217,000 $ 153,000 $ 6,370,000
Operating expenses (3,631,000) - (1,150,000) - (4,781,000) (122,000) (4,903,000)
Real estate taxes (963,000) - - - (963,000) (38,000) (1,001,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 2,060,000 (1,858,000) 271,000 - 473,000 (7,000) 466,000
Mortgage interest expense (2,038,000) - - - (2,038,000) (77,000) (2,115,000)
Depreciation (1,308,000) - - - (1,308,000) (17,000) (1,325,000)
Gain on sale of real estate - - - - - 1,161,000 1,161,000
General and administrative
Expense - - - (807,000) (807,000) - (807,000)
Other income - - - (170,000) (170,000) - (170,000)
Income tax benefit - - - 1,464,000 1,464,000 (403,000) 1,061,000
Minority interest benefit - - - 514,000 514,000 - 514,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(1,286,000) $(1,858,000) $ 271,000 $ 1,001,000 $ (1,872,000) $ 657,000 $ (1,215,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $79,293,000 $ 7,991,000 $32,242,000 $10,118,000 $ 129,644,000 - $129,644,000
=========== =========== =========== =========== ============ ============ ============
Real Estate
-------------------------
Six months ended Rental Justice Investment Discontinued
December 31, 2004 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 6,535,000 $ (280,000) $ 2,311,000 $ - $ 8,566,000 $ 838,000 $ 9,404,000
Operating expenses (2,907,000) - (1,400,000) - (4,307,000) (542,000) (4,849,000)
Real estate taxes (1,108,000) - - - (1,108,000) (118,000) (1,226,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 2,520,000 (280,000) 911,000 - 3,151,000 178,000 3,329,000
Loss on early term. of debt (133,000) - - - (133,000) - (133,000)
Mortgage interest expenses (1,881,000) - - - (1,881,000) (409,000) (2,290,000)
Depreciation (1,337,000) - - - (1,337,000) (173,000) (1,510,000)
Amort. of intangible asset (333,000) - - - (333,000) - (333,000)
Gain on sale of RE - - - - - 6,006,000 6,006,000
General and administrative
expenses - - - (702,000) (702,000) - (702,000)
Other income - - - 94,000 94,000 - 94,000
Income tax expense - - - 456,000 456,000 (2,241,000) (1,785,000)
Minority interest - - - 49,000 49,000 - 49,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(1,164,000) $ (280,000) $ 911,000 $ (103,000) $ (636,000) $ 3,361,000 $ 2,725,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $85,916,000 $11,048,000 $68,118,000 $ 5,935,000 $ 171,017,000 - $171,017,000
=========== =========== =========== =========== ============ ============ ============
8. Subsequent event
In February 2006, the Company sold approximately 5.4 acres of unimproved land
located in Pasadena, Texas for $467,000.
-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, 2005 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
In December 2005, the Company sold its 54-unit apartment complex located in
Irving, Texas for $3,100,000 and realized a gain on the sale of real estate of
$598,000. The Company received net proceeds of $2,931,000 after selling costs
and attorney's fees.
In November 2005, the Company sold its 5-unit apartment complex located in Los
Angeles, California for $1,620,000 and realized a gain on the sale of real
estate of $587,000. The Company received net proceeds of $870,000 after
selling costs and attorney's fees and the repayment of the mortgage note in the
amount of $660,000.
In August 2005, the Company sold its 112-unit apartment complex located in
Austin, Texas for $4,400,000 and realized a net loss on the sale real estate of
$24,000. The Company received net proceeds of $1,664,000 after selling costs
and attorney's fees and the repayment of the mortgage note in the amount of
$2,186,000.
As of January 12, 2006 the Hotel renovation work was substantially completed,
at which time the Partnership obtained approval from Hilton to open the Hotel
as the "Hilton San Francisco Financial District". The Hotel opened with a
limited number of rooms available to rent, which number has increased as the
Hotel transitions into full operations and all of the guest rooms, suites and
amenities are completed. It is expected that project will be totally finished
in February 2006.
The newly opened Hilton hotel will have 549 well appointed guestrooms and
luxury suites with bay or city views, featuring large working desks, ergonomic
chairs, wired and wireless high-speed Internet access, and "The Suite Dreams"
beds by Hilton, complete with duvet, down comforter and jumbo size pillows. The
newly redesigned meeting rooms and ballroom will accommodate meetings and
events for up to 500 people with video conferencing and premium audio/visual
equipment. A new business center and fitness center are additional amenities.
The new Hilton hotel also has the only hotel day spa (Tru Spa) in the Financial
District. A redesigned entryway is integrated into the lobby and management
expects the new restaurant "Seven Fifty" and lounge, with a dramatic fireplace
-15-
treatment, will bring a new level of excitement and service to the guests of
the hotel. Management believes that the new Hilton hotel will now be able to
directly compete with all hotels in the Financial District.
On January 20, 2006, the Partnership obtained a $4,500,000 increase in its
existing line of credit capacity with United Commercial Bank, raising the total
amount available to the Partnership pursuant to that line of credit to
$14,500,000. The increase in the credit line is on the same terms as the
existing line of credit with additional loan and documentation fees of $4,000.
RESULTS OF OPERATIONS
For the Three Months Ended December 31, 2005 Compared to the
Three Months Ended December 31, 2004
The Company had a net loss of $285,000 for the three months ended December 31,
2005 compared to net income of $1,927,000 for the three months ended December
31, 2004. As discussed below, the change was primarily attributable to the
significant decrease in investment gains from the Company's marketable
securities portfolio, the increase in the loss from the Company's equity
investment in Justice Investors and the increase in other expenses, partially
offset by the gain from the sale of real estate.
The loss from real estate operations decreased to $790,000 for the three months
ended December 31, 2005 from $847,000 for the three months December 31, 2004.
Property operating expenses increased to $1,946,000 from $1,519,000 partially
due to $150,000 in consulting fees for professional services provided during
the quarter to assist management with the improvement of the Company's real
estate operations and to help with the sale of certain non-strategic real
estate properties. In an effort to improve the Company's real estate
operations by providing better service to its tenants and to increase the
economic occupancy of our properties, the Company also incurred additional
leasing, salary, repairs and maintenance expenses and other operating expenses.
The real estate portfolio also had an increase in utilities expense. These
increases were partially offset by lower property insurance bills. During
quarter ended December 31, 2005, the Company sold two properties and realized a
gain on the sale of real estate of $1,185,000. In December 2005, the Company
sold its 54-unit apartment complex located in Irving, Texas for $3,100,000 and
realized a gain on the sale of real estate of $598,000. In November 2005, the
Company sold its 5-unit apartment complex located in Los Angeles, California
for $1,620,000 and realized a gain on the sale of real estate of $587,000. The
gain on the sale of these two properties and the related revenues and expenses
are excluded from the real estate operations and are presented under
discontinued operations.
The loss from the Company's equity investment in Justice Investors increased to
$1,071,000 for the three months ended December 31, 2005 from $357,000 for the
three months ended December 31, 2004. Effective, May 31, 2005, the Partnership
elected to close down its Hotel operations to complete the renovations of the
Hotel as required by the Hilton Franchise Agreement. Thus, the Partnership net
loss for the three months ended December 31, 2005 did not include any operating
results from the Hotel, while the three months ended December 31, 2004 included
the direct operating results of the Hotel. The net operating loss from the
Hotel for the three months ended December 31, 2004, was approximately $490,000.
The overall increase in Partnership's net loss was attributable to a decrease
in garage rent to approximately $168,000 from approximately $244,000 related to
the closing of the Hotel, and increased costs in the current quarter related to
higher interest expenses, property taxes, insurance costs, professional fees,
security personnel and other costs for the repositioning of the Hotel,
including additional costs to meet governmental code and permitting
requirements.
-16-
Management believed that the hotel could not continue to be competitive under
the conditions it operated as a Holiday Inn Select brand hotel. Average daily
room rates for the hotel had decreased to approximately $90 in fiscal 2005 from
approximately $92 in fiscal 2004, while average monthly occupancy rates had
decreased to approximately 65% in fiscal 2005 from approximately 71% in fiscal
2004. While the hotel had traditionally enjoyed a favorable year-round
occupancy rate, both occupancy and average daily room rates have suffered since
fiscal year ended June 30, 2001 and the hotel has lagged far behind its
competitors. Newer and more upscale properties opened in or near the Financial
District, which provided greater amenities to their guests, making it difficult
for the Partnership's hotel to compete. Those competitors were much better
positioned to attract both the business traveler and tourists and to achieve
higher occupancy and room rates. The Partnership believes that the major
renovations to the Hotel, coupled with the strength of the Hilton brand and
reservation system, along with the hotel management expertise of Dow, will
allow the Hotel to directly compete with all hotels in the Financial District.
Net gains on marketable securities decreased to $1,307,000 for the three months
ended December 31, 2005 from $6,705,000 for the three months ended December 31,
2004. For the three months ended December 31, 2005, the Company had net
realized gains of $58,000 and net unrealized gains of $1,249,000. For the
three months ended December 31, 2004, the Company had net realized gains of
$381,000 and net unrealized gains of $6,324,000. 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 decreased to $122,000 from $199,000 as the result
of the decreased investment in dividend yielding securities.
Margin interest and trading expenses decreased to $590,000 from $824,000
primarily as the result of the $320,000 performance-based compensation earned
by the Company's CEO for his management of the Company's portfolio for the
quarter ended December 31, 2004. There were no bonuses earned during the
quarter ended December 31, 2005. Margin interest expense also decreased to
$148,000 from $209,000 as the result of maintaining lower margin balances
during the current period.
General and administrative expenses increased to $469,000 from $321,000 as the
result of the increase in accounting related expenses, tax consulting and
preparation fees and the expense of improving the Company's corporate computer
and communications systems.
Other income (expense) changed to an expense of $183,000 from income of $8,000
as a result of the $189,000 in litigation expenses and reserves recorded in the
current period related to the Company's operations.
The provision for income tax benefit(expense) changed to a benefit of $283,000
for the three months ended December 31, 2005 from an expense of $1,683,000 for
the three months ended December 31, 2004 due to the pre-tax loss incurred by
the Company in the current quarter as compared to pre-tax income of generated
during the quarter ended December 31, 2004.
Minority interest benefit (expense) changed to a benefit of $193,000 from an
expense of $596,000 as the result of the losses incurred by the Company's
subsidiary, Santa Fe, in the current quarter as compared to income generated in
the comparable quarter.
-17-
For the Six Months Ended December 31, 2005 Compared to the
Six Months Ended December 31, 2004
The Company had a net loss of $1,215,000 for the six months ended December 31,
2005 compared to net income of $2,725,000 for the six months ended December 31,
2004. As discussed below, the change was primarily attributable to the
decrease in the gain from the sale of real estate, to the increase in the loss
from the Company's equity investment in Justice Investors and the decrease in
income from investment transactions.
The loss from real estate operations increased to $1,286,000 for the six months
ended December 31, 2005 from $1,164,000 for the six months December 31, 2004.
Property operating expenses increased to $3,631,000 from $2,907,000 partially
due to $250,000 in consulting fees for professional services provided during
the six months ended December 31, 2005 to assist management with the
improvement of the Company's real estate operations and to help with the sale
of certain non-strategic real estate properties. In an effort to improve the
Company's real estate operations by providing better service to our tenants and
to increase the economic occupancy of our properties, the Company also incurred
additional salary, leasing, repairs and maintenance expenses and other
operating expenses. The real estate portfolio also had an increase in
utilities expense. These increases were partially offset by lower property
insurance bills. During six months ended December 31, 2005, the Company sold
three properties and realized a net gain on the sale of real estate of
$1,161,000. In December 2005, the Company sold its 54-unit apartment complex
located in Irving, Texas for $3,100,000 and realized a gain on the sale of real
estate of $598,000. In November 2005, the Company sold its 5-unit apartment
complex located in Los Angeles, California for $1,620,000 and realized a gain
on the sale of real estate of $587,000. In August 2005, the Company sold its
112-unit apartment complex located in Austin, Texas for $4,400,000 and realized
a net loss on the sale real estate of $24,000. The gain on the sale of these
three properties and the related revenues and expenses are excluded from the
real estate operations and are presented under discontinued operations.
The loss from the Company's equity investment in Justice Investors increased to
$1,858,000 for the six months ended December 31, 2005 from $280,000 for the six
months ended December 31, 2004. Effective, May 31, 2005, the Partnership
elected to close down its Hotel operations to complete the renovations of the
Hotel as required by the Hilton Franchise Agreement. Thus, the Partnership net
loss for the six months ended December 31, 2005 did not include any operating
results from the Hotel, while the six months ended December 31, 2004 included
the direct operating results of the Hotel. The net operating loss from the
Hotel for the six months ended December 31, 2004, was approximately $185,000.
The overall increase in Partnership's net loss was attributable to a decrease
in garage rent to approximately $325,000 from approximately $549,000 related to
the closing of the Hotel, and increased costs in the current quarter related to
higher interest expenses, property taxes, insurance costs, professional fees,
security personnel and other costs for the repositioning of the Hotel,
including additional costs to meet governmental code and permitting
requirements.
Management believed that the hotel could not continue to be competitive under
the conditions it operated as a Holiday Inn Select brand hotel. Average daily
room rates for the hotel had decreased to approximately $90 in fiscal 2005 from
approximately $92 in fiscal 2004, while average monthly occupancy rates had
decreased to approximately 65% in fiscal 2005 from approximately 71% in fiscal
2004. While the hotel had traditionally enjoyed a favorable year-round
occupancy rate, both occupancy and average daily room rates have suffered since
fiscal year ended June 30, 2001 and the hotel has lagged far behind its
-18-
competitors. Newer and more upscale properties opened in or near the Financial
District, which provided greater amenities to their guests, making it difficult
for the Partnership's hotel to compete. Those competitors were much better
positioned to attract both the business traveler and tourists and to achieve
higher occupancy and room rates. The Partnership believes that the major
renovations to the Hotel, coupled with the strength of the Hilton brand and
reservation system, along with the hotel management expertise of Dow, will
allow the Hotel to directly compete with all hotels in the Financial District.
Net gains on marketable securities decreased to $1,296,000 for the six months
ended December 31, 2005 from $2,078,000 for the six months ended December 31,
2004. For the six months ended December 31, 2005, the Company had net realized
losses of $123,000 and net unrealized gains of $1,419,000. For the six months
ended December 31, 2004, the Company had net realized gains of $505,000 and net
unrealized gains of $1,573,000. 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.
During the six months ended December 31, 2005, the Company recorded an
impairment loss on other investments (private placement investments) of
$299,000 compared to $258,000 during the six months ended December 31, 2004.
The Company reviews its other investments for impairment on a periodic basis.
Dividend and interest income decreased to $424,000 from $491,000 as the result
of the decreased investment in dividend yielding securities.
Margin interest and trading expenses decreased to $1,150,000 from $1,400,000 as
the result of the decrease in margin interest to $321,000 from $461,000 due to
the maintenance of lower margin balances during the current period and the
decrease in administrative, staff and trading research related expenses.
Included in the six months ended December 31, 2004 trading expenses was the
$320,000 performance-based compensation earned by the Company's CEO for his
management of the Company's portfolio. There were no bonuses earned during the
six months ended December 31, 2005.
General and administrative expenses increased to $807,000 from $702,000 as the
result of the increase in accounting related expenses, tax consulting and
preparation fees and the expense of improving the Company's corporate computer
and communications systems.
Other income(expense) changed to an expense of $170,000 from income of $94,000
primarily as the result of the $189,000 in litigation expenses and reserves
recorded in the current period related to the Company's operations and the
receipt of $69,000 during the six months ended December 31, 2004 from Justice
Investors for management's involvement in the positioning of the hotel.
The provision for income tax benefit(expense) changed to a benefit of
$1,061,000 for the six months ended December 31, 2005 from an expense of
$1,785,000 for the six months ended December 31, 2004 due to the pre-tax loss
incurred by the Company during the six months ended December 31, 2005 as
compared to pre-tax income of generated during the six months ended December
31, 2004.
Minority interest benefit increase to $514,000 from $49,000 as the result of
the higher losses incurred by the Company's subsidiary, Santa Fe, during the
six months ended December 31, 2005 as compared to the six months ended December
31, 2004.
-19-
MARKETABLE SECURITIES
The Company's investment portfolio is diversified with 96 different equity
positions. The portfolio contains five individual equity securities that are
more than 5% of the equity value of the portfolio with the largest security
being 9.1% of the 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, 2005, the Company had investments in marketable equity
securities of $32,242,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
December 31, 2005.
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Internet and technology $ 5,139,000 15.9%
Telecommunications and media 4,669,000 14.5%
Insurance, banks and brokers 4,097,000 12.7%
Services 3,705,000 11.5%
Paper mills, steel mills, metals
and chemicals 3,421,000 10.6%
Real estate investment trusts(REITs) 3,004,000 9.3%
Pharmaceuticals and healthcare 2,591,000 8.0%
Restaurants and consumer goods 1,735,000 5.4%
Automobiles and motor vehicle parts 1,568,000 4.9%
Electric and energy 683,000 2.1%
Other 1,630,000 5.1%
---------- ------
$ 32,242,000 100.0%
========== ======
The following table shows the investment gain(loss) on the Company's marketable
securities and the associated margin interest and trading expenses for the
three and six months ended December 31, 2005 and 2004, respectively.
For the three months ended December 31, 2005 December 31, 2004
------------------ ------------------
Net gains on marketable securities $ 1,307,000 $ 6,705,000
Impairment loss on other investments (241,000) (258,000)
Dividend & interest income 122,000 199,000
Margin interest expense (148,000) (209,000)
Trading and management expenses (442,000) (615,000)
------------ ------------
Investment income $ 598,000 $ 5,822,000
============ ============
-20-
For the six months ended December 31, 2005 December 31, 2004
------------------ ------------------
Net gains on marketable securities $ 1,296,000 $ 2,078,000
Impairment loss on other investments (299,000) (258,000)
Dividend & interest income 424,000 491,000
Margin interest expense (321,000) (461,000)
Trading and management expenses (829,000) (939,000)
------------ ------------
Investment income $ 271,000 $ 911,000
============ ============
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, 2005, operating activities used cash
of $2,442,000, investing activities provided cash of $6,024,000 and financing
activities used cash of $3,854,000.
During the six months ended December 31, 2005, the Company made property
improvements in the aggregate amount of $1,831,000. 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 December 2005, the Company sold its 54-unit apartment complex located in
Irving, Texas for $3,100,000 and realized a gain on the sale of real estate of
$598,000. The Company received net proceeds of $2,931,000 after selling costs
and attorney's fees.
In November 2005, the Company sold its 5-unit apartment complex located in Los
Angeles, California for $1,620,000 and realized a gain on the sale of real
estate of $587,000. The Company received net proceeds of $870,000 after
selling costs and attorney's fees and the repayment of the mortgage note in the
amount of $660,000.
In August 2005, the Company sold its 112-unit apartment complex located in
Austin, Texas for $4,400,000 and realized a net loss on the sale real estate of
$24,000. The Company received net proceeds of $1,664,000 after selling costs
and attorney's fees and the repayment of the mortgage note in the amount of
$2,186,000. A portion of the net proceeds from the sale was used to pay down
the Company's line of credit by $255,000.
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 was 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 total cost of the renovation project will be approximately
$41 million. That amount includes approximately $35 million for the actual
cost of the renovations and approximately $6 million for construction interest
and estimated carrying costs of operations during the renovation period and for
the first couple of months of operations after the hotel opens. That amount
reflects an increase in the Partnership's prior estimates primarily due to
increased renovation and design costs related to additional governmental code
and permitting requirements.
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To meet its substantial financial commitments for the renovation project,
Justice has relied on additional borrowings to meet its obligations. On July
27, 2005, Justice entered into a first mortgage loan (the "Prudential Loan")
with The Prudential Insurance Company of America in a principal amount of
$30,000,000. The term of the Loan is for 120 months at a fixed interest rate of
5.22% per annum. The Loan calls for monthly installments of principal and
interest in the amount of approximately $165,100, calculated on a 360 month
amortization schedule. The Loan is collateralized by a first deed of trust on
the Partnership's Hotel property, including all improvements and personal
property thereon and an assignment of all present and future leases and rents.
The Loan is without recourse to the limited and general partners of Justice.
On July 27, 2005, Justice also obtained a $10,000,000 Revolving Line of Credit
("LOC") from United Commercial Bank. The term of the LOC is for 60 months at an
annual interest rate based on the index selected by Justice at the time of the
request for each advance. The interest rate will either be a variable rate
equal to The Wall Street Journal Prime Rate or the Libor Rate plus 2%, fixed
for the period selected by the Partnership. The LOC is collateralized by a
second deed of trust on the Hotel property. Interest only is payable monthly
with principal and accrued interest due at maturity. As of December 31, 2005,
$6,778,000 of the LOC was utilized by the Partnership.
On January 20, 2006, the Partnership obtained a $4,500,000 increase in its
existing line of credit capacity with United Commercial Bank, raising the total
amount available to the Partnership pursuant to that line of credit to
$14,500,000. The increase in the credit line is on the same terms as the
existing line of credit with additional loan and documentation fees of $4,000.
Justice believes that the Prudential Loan and the LOC will provide sufficient
financial resources for the Partnership to complete the substantial renovations
to the Hotel required by its Franchise License Agreement with Hilton and to
meet its debt service requirements and operating capital needs through the
reopening of the Hotel and to sustain its operating cash needs until the Hotel
begins generating net income which the Partnership expects to be in the Spring
of 2006. The Partnership believes that the revenues expected to be generated
from the Hotel operations will be sufficient to meet all of its current and
future obligations and financial requirements.
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.
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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.
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) There were no purchases of equity securities by the small business issuer
or affiliates during the period covered by this report.
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. 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 this report. As of December 31,
2005, there were 73,496 shares remaining under the existing plan that may be
repurchased.
Item 5. Other Information.
Director Mildred Bond Roxborough has informed the Company that she will be
retiring from the Board of Directors at the expiration of her term as a Class C
Director at the Company's annual meeting of shareholders, which will be held on
February 22, 2006. As permitted by the Company's Certificate of Incorporation
and Bylaws, the Board has determined to reduce the number of directors to five
and to not propose another Class C Director to replace Ms. Roxborough. Ms.
Roxborough's decision to retire was not the result of any disagreements with
the Company.
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) Reports on Form 8-K:
-------------------
The Company did not file any reports on Form 8-K during the last quarter of the
period covered by this Report.
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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, 2006 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: February 13, 2006 by /s/ David T. Nguyen
------------------------------
David T. Nguyen, Treasurer
and Controller
(Principal Accounting Officer)
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