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, 2008
[ ] 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 May 8, 2008 was 2,346,741 shares.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
INDEX
THE INTERGROUP CORPORATION
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited)
As of March 31, 2008 3
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2008 and 2007 4
Condensed Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended March 31, 2008 and 2007 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 31, 2008 and 2007 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Controls and Procedures 25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits 28
SIGNATURES 28
-2-
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of March 31, 2008
-----------
ASSETS
Investment in hotel, net $ 48,653,000
Investment in real estate, net 65,634,000
Property held for sale 7,037,000
Investment in marketable securities 6,886,000
Other investments 6,745,000
Cash and cash equivalents 647,000
Restricted cash 1,283,000
Prepaid expenses and other assets 4,054,000
Minority interest of Justice Investors 6,567,000
-----------
Total assets $147,506,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 11,216,000
Due to securities broker 1,930,000
Obligation for securities sold 33,000
Lines of credit 4,608,000
Mortgage note payable - hotel 47,657,000
Mortgage note payable - real estate 61,102,000
Mortgage note payable - property held for sale 10,364,000
Deferred income taxes 1,626,000
-----------
Total liabilities 138,536,000
-----------
Minority interest 3,830,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized; none issued -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,200,093 issued, 2,346,741 outstanding 21,000
Additional paid-in capital 8,802,000
Retained earnings 5,468,000
Treasury stock, at cost, 853,352 shares (9,151,000)
-----------
Total shareholders' equity 5,140,000
-----------
Total liabilities and shareholders' equity $147,506,000
===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended March 31, 2008 2007
----------- -----------
Hotel operations:
Hotel and garage revenue $ 8,799,000 $ 7,654,000
Operating expenses (7,352,000) (7,357,000)
Real estate taxes (177,000) (176,000)
Interest expense (745,000) (745,000)
Depreciation and amortization (1,105,000) (1,042,000)
----------- -----------
Loss from hotel operations (580,000) (1,666,000)
----------- -----------
Real estate operations:
Rental income 3,318,000 2,789,000
Property operating expense (1,312,000) (1,345,000)
Real estate taxes (362,000) (382,000)
Mortgage interest expense (847,000) (881,000)
Depreciation (581,000) (742,000)
----------- -----------
Income(loss) from real estate operations 216,000 (561,000)
----------- -----------
Investment transactions:
Net (losses)gains on marketable securities (2,345,000) 1,737,000
Impairment loss on other investments (1,117,000) -
Dividend and interest income 32,000 98,000
Margin interest and trading expenses (456,000) (577,000)
----------- -----------
Income(loss) from investment transactions (3,886,000) 1,258,000
----------- -----------
General and administrative expense (407,000) (549,000)
----------- -----------
Loss before income tax and minority interest (4,657,000) (1,518,000)
Minority interest - Justice Investors, pre-tax 266,000 879,000
----------- -----------
Loss before income tax (4,391,000) (639,000)
Income tax benefit 1,726,000 274,000
----------- -----------
Loss before minority interest (2,665,000) (365,000)
Minority interest, net of tax 697,000 80,000
----------- -----------
Loss from continuing operations (1,968,000) (285,000)
----------- -----------
Income from discontinued operations, net of tax 68,000 20,000
----------- -----------
Net loss $ (1,900,000) $ (265,000)
=========== ===========
Net loss per share from continuing operations
Basic $ (0.84) $ (0.12)
=========== ===========
Diluted $ (0.84) $ (0.12)
=========== ===========
Net income per share from discontinued operations
Basic $ 0.03 $ 0.01
=========== ===========
Diluted $ 0.03 $ 0.01
=========== ===========
Net loss per share
Basic $ (0.81) $ (0.11)
=========== ===========
Diluted $ (0.81) $ (0.11)
=========== ===========
Weighted average shares outstanding 2,350,916 2,351,246
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine months ended March 31, 2008 2007
----------- -----------
Hotel operations:
Hotel and garage revenue $ 28,204,000 $ 23,362,000
Operating expenses (23,959,000) (20,939,000)
Real estate taxes (531,000) (558,000)
Interest expense (2,150,000) (2,180,000)
Depreciation and amortization (3,306,000) (3,116,000)
----------- -----------
Loss from hotel operations (1,742,000) (3,431,000)
----------- -----------
Real estate operations:
Rental income 9,442,000 8,140,000
Property operating expense (3,586,000) (4,549,000)
Real estate taxes (1,037,000) (1,147,000)
Mortgage interest expense (2,645,000) (2,665,000)
Depreciation (1,678,000) (1,643,000)
----------- -----------
Income(loss) from real estate operations 496,000 (1,864,000)
----------- -----------
Investment transactions:
Net(losses)gains on marketable securities (2,347,000) 2,167,000
Impairment loss on other investments (1,242,000) -
Dividend and interest income 144,000 245,000
Margin interest and trading expenses (1,261,000) (1,613,000)
----------- -----------
Income(loss) from investment transactions (4,706,000) 799,000
----------- -----------
General and administrative expense (1,238,000) (1,288,000)
----------- -----------
Loss before income tax and minority interest (7,190,000) (5,784,000)
Minority interest - Justice Investors, pre-tax 801,000 1,714,000
----------- -----------
Loss before income tax (6,389,000) (4,070,000)
Income tax benefit 2,518,000 1,663,000
----------- -----------
Loss before minority interest (3,871,000) (2,407,000)
Minority interest, net of tax 1,038,000 326,000
----------- -----------
Loss from continuing operations (2,833,000) (2,081,000)
Income(loss) from discontinued operations,
net of tax 2,543,000 (12,000)
----------- -----------
Net loss $ (290,000) $ (2,093,000)
=========== ===========
Net loss per share from continuing operations
Basic $ (1.20) $ (0.88)
=========== ===========
Diluted $ (1.20) $ (0.88)
=========== ===========
Net income(loss) per share from discontinued operations
Basic $ 1.08 $ (0.01)
=========== ===========
Diluted $ 1.08 $ (0.01)
=========== ===========
Net loss per share
Basic $ (0.12) $ (0.89)
=========== ===========
Diluted $ (0.12) $ (0.89)
=========== ===========
Weighted average shares outstanding 2,351,889 2,354,703
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
THE INTEGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended March 31, 2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $ (290,000) $ (2,093,000)
Adjustments to reconcile net loss to
cash (used in)provided by operating activities:
Depreciation and amortization 4,984,000 5,147,000
Impairment loss on other investments 1,242,000 -
Gain on sale of real estate (4,074,000) -
Net unrealized loss on investments 2,880,000 586,000
Minority interest benefit (1,839,000) (2,040,000)
Issuance of stock to directors 72,000 -
Changes in assets and liabilities:
Investment in marketable securities 7,997,000 9,860,000
Other investments (2,693,000) (3,600,000)
Prepaid expenses and other assets (135,000) (444,000)
Accounts payable and other liabilities (1,181,000) 1,914,000
Due to securities broker (6,205,000) (1,216,000)
Obligation for securities sold (1,452,000) (5,685,000)
Deferred tax liability (864,000) (1,672,000)
----------- -----------
Net cash (used in)provided by operating activities (1,558,000) 757,000
----------- -----------
Cash flows from investing activities:
Net proceeds from sale of real estate 7,739,000 -
Additions to buildings, improvements
and equipment (3,666,000) (2,110,000)
Purchase of Portsmouth stock (28,000) -
Purchase of Santa Fe stock (77,000) (18,000)
Restricted cash 2,826,000 438,000
----------- -----------
Net cash provided by(used in) investing activities 6,794,000 (1,690,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 6,850,000 19,325,000
Principal payments on mortgage notes payable (13,348,000) (17,246,000)
Borrowings from line of credit 350,000 -
Distributions to minority partners (500,000) (500,000)
Purchase of treasury stock (99,000) (156,000)
----------- -----------
Net cash (used in)provided by financing activities (6,747,000) 1,423,000
----------- -----------
Net (decrease)increase in cash and cash equivalents (1,511,000) 490,000
Cash and cash equivalents at beginning of
period 2,158,000 2,935,000
----------- -----------
Cash and cash equivalents at end of period $ 647,000 $ 3,425,000
=========== ===========
Supplemental information:
Interest paid $ 5,048,000 $ 5,361,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-6-
THE INTERGROUP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by The
InterGroup Corporation ("InterGroup" or the "Company"), without audit,
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
the consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes the disclosures that are
made are adequate to make the information presented not misleading. Further,
the consolidated financial statements reflect, in the opinion of management,
all adjustments (which included only normal recurring adjustments) necessary
for a fair statement of the financial position, cash flows and results of
operations as of and for the periods indicated.
As of March 31, 2008, the Company had the power to vote 79.4% of the common
stock of Santa Fe Financial Corporation ("Santa Fe"), a public company (OTCBB:
SFEF). This percentage includes the power to vote an approximately 4% interest
in the common stock of Santa Fe owned by the Company's Chairman and President
pursuant to a voting trust agreement entered into on June 30, 1998.
Santa Fe's operations primarily consist of owning and managing the Company's
hotel property through its 68.8%-owned consolidated subsidiary, Portsmouth
Square, Inc. ("Portsmouth"), a public company (OTCBB: PRSI), in Justice
Investors ("Justice", the Hotel" or the "Partnership"), a California limited
partnership. InterGroup also directly owns approximately 11% of the common
stock of Portsmouth.
Portsmouth has a 50.0% limited partnership interest in Justice in which
Portsmouth serves as both a general and limited partner. The other general
partner, Evon Corporation ("Evon"), serves as the managing general partner of
Justice. In accordance with guidance set forth in the Financial Accounting
Standards Board ("FASB") directed Staff Position (FSP) SOP 78-9-1, the Company
has applied the principles of accounting applicable for investments in
subsidiaries due to its "kick out rights" and "substantive participating
rights" arising from its limited partnership and general partnership interests
and has consolidated the financial statements of Justice with those of the
Company, effective with the first reporting period of its fiscal year beginning
July 1, 2006.
The Company also derives income from its rental properties and the investment
of its cash in marketable securities and other investments.
Minority interest on the balance sheet represents the interest in subsidiaries
not owned by the Company. Minority interest on the statement of operations
represents the minority owner's share of income(loss). As of March 31, 2008,
the Company had a minority interest asset balance on the balance sheet as the
result of the accumulated deficit at Justice Investors. Management believes
the accumulated deficit is considered temporary as the Hotel was temporary
closed to undergo major renovations from May 2005 to January 2006. The Company
expects the Hotel to be profitable, thereby reversing the accumulated deficit
in the future. Of the total minority interest liability of $3,830,000 on the
balance sheet, $1,980,000 is related to the minority shareholders of Portsmouth
and $1,850,000 is related to the minority shareholders of Santa Fe.
-7-
Certain prior period balances have been reclassified to conform with the
current period presentation.
The results of operations for the three and nine months ended March 31, 2008
are not necessarily indicative of results to be expected for the full fiscal
year ending June 30, 2008.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
which clarifies the accounting for uncertainty in tax positions. FIN 48
requires that the Company recognize the impact of a tax position in the
Company's financial statements if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of the Company's 2008
fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The adoption of FIN 48
did not have a material impact on the Company's consolidated financial
statements. The Company recognizes interest and penalties related to uncertain
income tax positions in income tax expense. There were no interest and
penalties related to uncertain income tax positions that were accrued as of
March 31, 2008 and during the period there were no changes in individual or
aggregate unrecognized tax positions. The Company's income tax returns for the
years ended June 30, 2004 up to present are subject to examination by certain
taxing authorities.
In September 2006, the FASB issued Statement of Financial Accounting
Standards("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"), which
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS 157 is effective as of
the beginning of the Company's 2009 fiscal year. In February 2007, the FASB
issued Statement of Financial Accounting Standards No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115" ("SFAS 159"), which permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
159 is effective as of the beginning of the Company's 2009 fiscal year. The
Company is still evaluating the impact of SFAS 157 and 159 on the Company's
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces SFAS No. 141. SFAS 141R establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity's fiscal
year that begins after December 15, 2008 (the Company's fiscal year 2010). The
Company is currently assessing the impact of SFAS 141R on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, and amendment to Accounting Research
Bulletin (ARB) No. 51," ("SFAS 160"). This standard prescribes the accounting
by a parent company for minority interests held by other parties in a
subsidiary of the parent company. SFAS 160 is effective for fiscal years
beginning after December 15, 2008 (the Company's fiscal year 2010). The Company
is currently assessing the impact of SFAS 160 on its consolidated financial
statements.
-8-
Income(Loss) Per Share
Basic net income(loss) per share is computed by dividing net income(loss)
available to common stockholders by the weighted average number of common
shares outstanding. The computation of diluted net income(loss) per share is
similar to the computation of basic income(loss) 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. As of March 31, 2008, the Company had 385,500 stock
options that were considered potentially dilutive common shares and 19,500
stock options that were considered anti-dilutive. As of March 31, 2007, the
Company had 371,250 stock options that were considered potentially dilutive
common shares and 33,750 stock options that were considered anti-dilutive.
However, the basic and diluted loss per share are the same as the result of the
Company having a net loss from continuing operations for the three and nine
months March 31, 2008 and 2007, respectively.
Stock-Based Compensation Plans
As of March 31, 2008, the Company has two stock option plans, which are more
fully described in Note 1 of the Company's Annual Report on Form 10-KSB for
fiscal year ended June 30, 2007. On July 1, 2006, the Company implemented
Statement of Financial Accounting Standards 123(Revised 2004), "Share-Based
Payments"("SFAS No. 123R") which replaced SFAS No. 123 and supercedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and the related implementation guidance. SFAS No. 123R addresses
accounting for equity-based compensation arrangements, including employee stock
options. The Company adopted the "modified prospective method" where stock-
based compensation expense is recorded beginning on the adoption date and prior
periods are not restated. Under this method, compensation expense is recognized
using the fair-value based method for all new awards granted after July 1,
2006. Additionally, compensation expense for unvested stock options that were
outstanding at July 1, 2006 is recognized over the requisite service period
based on the fair value of those options as previously calculated at the grant
date under the pro-forma disclosures of SFAS 123. The fair value of each grant
is estimated using the Black-Scholes option pricing model.
During the three and nine months ended March 31, 2008, there were no options
granted or exercised. Accordingly, no stock-based compensation expense was
recognized during the period. Since inception of the two stock options plans,
there have been no options exercised. For the quarter ended March 31, 2008,
2,250 employee options vested. However, the fair value of the vested options is
considered immaterial.
The following table summarizes the stock option activity for the periods
indicated:
Number of Weighted-average
Shares Exercise Price
---------- ---------------
Unexercised options
Outstanding at July 1, 2007 405,000 $9.91
Granted - -
Exercised - -
Forfeited - -
---------- ---------------
Unexercised options
Outstanding at March 31, 2008 405,000 $9.91
========== ===============
-9-
As of March 31, 2008, of the total 405,000 unexercised options outstanding,
4,500 were not yet vested.
Unexercised Range of Weighted Average Weighted Average
Options Exercise Price Exercise Price Remaining Life
---------------- -------------- ---------------- ----------------
March 31, 2008 $7.92-$29.63 $ 9.91 1.75 years
On February 21, 2007, the stockholders of the Company approved The InterGroup
Corporation 2007 Stock Compensation Plan for Non-Employee Directors (the "2007
Plan"), which was thereafter adopted by the Board of Directors. The 2007 Plan
was adopted to replace the 1998 Stock Option Plan for Non-Employee Directors.
Pursuant to the 2007 Plan, each non-employee director is entitled to an annual
grant of a number of shares of Common Stock of the Company equal in value to
$18,000 based on the fair market value of the Common Stock on the date of grant
and a grant of 600 shares of Common Stock upon the formal adoption of the 2007
Plan by the Board. The 2007 Plan is more fully described in Note 15 of the
Company's Annual Report on Form 10-KSB for fiscal year ended June 30, 2007.
For the nine months ended March 31, 2008, the four non-employee directors of
the Company each received a grant of 987 shares of Common Stock pursuant to the
2007 Plan. The Company recorded an expense of approximately $72,000 related to
the issuance of the 3,948 shares of the Company's common stock.
NOTE 2 - INVESTMENT IN HOTEL, NET
Justice owns a 544 room hotel property located at 750 Kearny Street, San
Francisco, California 94108, known as the "Hilton San Francisco Financial
District" (the "Hotel") and related facilities, including a five level
underground parking garage. Justice serves as the owner/operator of the Hotel
with the assistance of a third party management company. The Partnership also
derives income from a lease of the garage with Evon and from a lease with Tru
Spa for a portion of the lobby level of the Hotel.
Land, property and equipment as of March 31, 2008 consisted of the following:
Accumulated Net Book
Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 16,267,000 (7,178,000) 9,089,000
Building and improvements 52,964,000 (16,138,000) 36,826,000
------------ ------------ ------------
$ 71,969,000 $(23,316,000) $ 48,653,000
============ ============ ============
NOTE 3 - INVESTMENT IN REAL ESTATE
As of March 31, 2008, investment in real estate included the following:
Land $ 24,735,000
Buildings, improvements and equipment 60,546,000
Accumulated depreciation (19,647,000)
----------
$ 65,634,000
==========
-10-
In August 2007, the Company refinanced its $7,203,000 construction loan on its
30-unit apartment complex located in Los Angeles, California and obtained a
mortgage note payable in the amount of $6,850,000. The term of the note is 15
years, with interest only for the first two years. The interest is fixed at
5.97%.
NOTE 4 - PROPERTY HELD FOR SALE
In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate
of $4,074,000. The Company received net proceeds after selling costs of
$7,739,000 and paid off the related outstanding mortgage note payable of
$4,007,000.
During the nine months ended March 31, 2008, the Company had listed for sale
its 249-unit apartment building located in Austin, Texas and its 132-unit
apartment located in San Antonio, Texas (both classified as Held for Sale on
the balance sheet). 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 or listed for sale 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 two properties have been reclassified from continuing operations for the
three and nine months ended March 31, 2008 and 2007 and are reported as
income(loss) from discontinued operations in the consolidated statements of
operations.
The revenues and expenses from the operation of these three properties during
the three and nine months ended March 31, 2008 and 2007, are summarized as
follows:
For the three months ended March 31, 2008 2007
---------- ----------
Revenues $ 652,000 $ 921,000
Expenses (555,000) (888,000)
---------- ----------
Income $ 97,000 $ 33,000
========== ==========
For the nine months ended March 31, 2008 2007
---------- ----------
Revenues $2,145,000 $ 2,837,000
Expenses (2,022,000) (2,858,000)
---------- ----------
Income(loss) $ 123,000 $ (21,000)
========== ==========
NOTE 5 - INVESTMENT IN MARKETABLE SECURITIES
The Company's investment in marketable securities 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.
-11-
At March 31, 2008, 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, 2008
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- -----------
Equities $ 5,526,000 $2,435,000 ($1,075,000) $1,360,000 $6,886,000
As of March 31, 2008, the Company had $238,000 of unrealized losses related to
securities held for over one year.
As part of the investment strategies, the Company may assume short positions
against its long 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, 2008, the Company had
obligations for securities sold (equities short) of $33,000.
Net gains(losses) on marketable securities on the statement of operations are
comprised of realized and unrealized gains(losses). Below is the composition
of the net gains(losses) for the three and Nine months ended March 31, 2008 and
2007, respectively.
For the three months ended March 31, 2008 2007
----------- -----------
Realized gains on marketable securities $ 422,000 $ 455,000
Unrealized (losses)gains on marketable securities (2,767,000) 1,282,000
----------- -----------
Net (losses)gains on marketable securities $(2,345,000) $ 1,737,000
=========== ===========
For the nine months ended March 31, 2008 2007
----------- -----------
Realized gains on marketable securities $ 533,000 $ 2,753,000
Unrealized losses on marketable securities (2,880,000) (586,000)
----------- -----------
Net (losses)gains on marketable securities $(2,347,000) $ 2,167,000
=========== ===========
NOTE 6 - OTHER INVESTMENTS
As a part of its investment strategy, the Company may also invest, with the
approval of the Securities Investment Committee, in unlisted securities, such
as debt instruments, convertible notes, through private placements including
private equity investment funds. Those investments in non-marketable
securities are carried at cost on the Company's balance sheet as part of other
investments and reviewed for impairment on a periodic basis. During the three
and nine months ended March 31, 2008, the Company determined that two of its
investments had an other than temporary impairment and recorded an impairment
loss of $1,117,000 and $1,242,000, respectively, on other investments. As of
March 31, 2008, the Company had other investments of $6,745,000.
-12-
NOTE 7 - LINES OF CREDIT
During the quarter ended March 31, 2008, the Company utilized $650,000 from its
$3,000,000 revolving line of credit to meet its cash flow needs. The annual
interest rate is the LIBOR Rate plus 2% (4.75% as of March 31, 2008). The line
of credit matures February 2, 2009. Borrowings under this line of credit
contain certain financial covenants that require, among other things,
maintenance of minimum amounts and ratios of working capital and debt-coverage.
These financial covenants have not been met and Justice is in the process of
obtaining a waiver of noncompliance from the bank. Justice believes that the
bank will waive such noncompliance.
In April 2004, the Company obtained a revolving $5,000,000 line of credit
("LOC"). The LOC carries a variable interest rate(lender's base rate plus 1%).
Interest is paid on a monthly basis. As of March 31, 2008, the balance of the
LOC was $3,958,000 with the interest rate at 6.25%. In April 2008, the terms
of the LOC were modified to provide for an interest rate floor of 6.25%,
limited the LOC to the current balance of $3,958,000 and changed the LOC from
revolving to non-revolving with a maturity date of August 21, 2008.
NOTE 8 - SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel,
the operation of its multi-family residential properties and the investment of
its cash in marketable securities and other investments. 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, 2008 and 2007. Operating income for rental properties consists
of rental income. Operating income(loss) from Justice Investors consists of
the operations of the hotel and garage. Operating income(loss) for investment
transactions consist of net investment gains(losses)and dividend and interest
income.
As of and for the
Three months ended Hotel Real Estate Investment Discontinued
March 31, 2008 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $ 8,799,000 $ 3,318,000 $(3,430,000) $ - $ 8,687,000 $ 652,000 $ 9,339,000
Operating expenses (9,379,000) (3,102,000) (456,000) - (12,937,000) (555,000) (13,492,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) (580,000) 216,000 (3,886,000) - (4,250,000) 97,000 (4,153,000)
General and administrative
Expense - - - (407,000) (407,000) - (407,000)
Income tax expense - - - 1,726,000 1,726,000 (29,000) 1,697,000
Minority interest 266,000 - - 697,000 963,000 - 963,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (314,000) 216,000 $(3,886,000) $ 2,016,000 $ (1,968,000) $ 68,000 $ (1,900,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $51,684,000 $65,634,000 $13,631,000 $ 9,520,000 $ 140,469,000 $ 7,037,000 $147,506,000
=========== =========== =========== =========== ============ ============ ============
-13-
As of and for the
Three months ended Hotel Real Estate Investment Discontinued
March 31, 2007 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $ 7,654,000 $ 2,789,000 $ 1,835,000 $ - $ 12,278,000 $ 921,000 $ 13,199,000
Operating expenses (9,320,000) (3,350,000) (577,000) - (13,247,000) (888,000) (14,135,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) (1,666,000) (561,000) 1,258,000 - (969,000) 33,000 (936,000)
General and administrative
Expense - - - (549,000) (549,000) - (549,000)
Income tax benefit - - - 274,000 274,000) (13,000) 261,000
Minority interest 879,000 - - 80,000 959,000 - 959,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (787,000) (561,000) $ 1,258,000 $ (195,000) $ (285,000) $ 20,000 $ (265,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $46,679,000 $66,891,000 $26,684,000 $18,782,000 $ 159,036,000 $ 10,725,000 $169,761,000
=========== =========== =========== =========== ============ ============ ============
As of and for the
Nine months ended Hotel Real Estate Investment Discontinued
March 31, 2008 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $28,204,000 $ 9,442,000 $(3,445,000) $ - $ 34,201,000 $ 2,145,000 $ 36,346,000
Operating expenses (29,946,000) (8,946,000) (1,261,000) - (40,153,000) (2,022,000) (42,175,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) (1,742,000) 496,000 (4,706,000) - (5,952,000) 123,000 (5,829,000)
Gain on sale of real estate - - - - - 4,074,000 4,074,000
General and administrative
Expense - - - (1,238,000) (1,238,000) - (1,238,000)
Income tax expense - - - 2,518,000 2,518,000 (1,654,000) 864,000
Minority interest 801,000 - - 1,038,000 1,839,000 - 1,839,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (941,000) 496,000 $(4,706,000) $ 2,318,000 $ (2,833,000) $ 2,543,000 $ (290,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $51,684,000 $65,634,000 $13,631,000 $ 9,520,000 $ 140,469,000 $ 7,037,000 $147,506,000
=========== =========== =========== =========== ============ ============ ============
As of and for the
Nine months ended Hotel Real Estate Investment Discontinued
March 31, 2007 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $23,362,000 $ 8,140,000 $ 2,412,000 $ - $ 33,914,000 $ 2,837,000 $ 36,751,000
Operating expenses (26,793,000) (10,004,000) (1,613,000) - (38,410,000) (2,858,000) (41,268,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating loss (3,431,000) (1,864,000) 799,000 - (4,496,000) (21,000) (4,517,000)
General and administrative
Expense - - - (1,288,000) (1,288,000) - (1,288,000)
Income tax benefit - - - 1,663,000 1,663,000 9,000 1,672,000
Minority interest 1,714,000 - - 326,000 2,040,000 - 2,040,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(1,717,000) (1,864,000) $ 799,000 $ 701,000 $ (2,081,000) $ (12,000) $ (2,093,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $46,679,000 $66,891,000 $26,684,000 $18,782,000 $ 159,036,000 $ 10,725,000 $169,761,000
=========== =========== =========== =========== ============ ============ ============
-14-
NOTE 9 - 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.
The garage lessee, Evon, is the Partnership's managing general partner. Under
the terms of the lease agreement, Evon paid the Partnership $393,000 and
$348,000 for the three months ended March 31, 2008 and 2007, respectively. For
the nine months ended March 31, 2008 and 2007, Evon paid the Partnership
$1,229,000 and $1,159,000, respectively.
NOTE 10 - RESTATEMENTS
As disclosed in Item 4.02(a) of the Company's Form 8-K dated February 13, 2008,
as filed with the Securities and Exchange Commission ("SEC") on February 19,
2008, the Company detected an error in the calculation and presentation of the
tax effects on the minority interest related to Justice Investors in the
comparative three and six month periods ended December 31, 2007 as presented in
the Company's previously issued Quarterly Report on Form 10-QSB for the period
ended December 31, 2006. Specifically, the minority interest line item in the
Consolidated Statement of Operations was mistakenly recorded and presented as
"net of tax" instead of pre-tax. The errors resulted in an overstatement of the
tax benefit related to the minority interest for the reported periods ended
September 30, 2007, December 31, 2007 and March 31, 2007. The Company
subsequently filed amendments to its quarterly reports for the quarterly
periods ended March 31, 2007 and September 30, 2007 on Form 10-QSB/A.
The errors did not affect the Company's reported revenues, expenses, income
(loss) before income taxes or cash flows, and did not impact the Company's
operations. There were no such errors in the Company's audited financial
statements included in its Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2007 and, as such, that Annual Report was not amended.
The Condensed Consolidated Statement of Operations for the three and nine
months ended March 31, 2007 in this report reflects the restatements as
reported in the Company's amended report on Form 10-QSB/A for the quarterly
period ended March 31, 2007 as filed on February 27, 2008.
-15-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and
projections concerning future expectations. When used in this discussion, the
words "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," "may," "could," "might" and similar expressions, are intended to
identify forward-looking statements. These statements are subject to certain
risks and uncertainties, such as the impact of terrorism and war on the
national and international economies, including tourism and securities markets,
natural disasters, general economic conditions and competition in the hotel
industry in the San Francisco area, seasonality, labor relations and labor
disruptions, partnership distributions, the ability to obtain financing at
favorable interest rates and terms, securities markets, regulatory factors,
litigation and other factors discussed below in this Report and in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007,
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as to the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to those forward-
looking statements, which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's principal sources of revenue continue to be derived from the
investment of its 68.8% owned subsidiary, Portsmouth, in the Justice Investors
limited partnership ("Justice" or the "Partnership"), rental income from the
operations of its multi-family real estate properties and income derived from
investment of its cash in marketable securities and other investments.
Portsmouth has a 50.0% limited partnership interest in Justice and serves as
one of the general partners. Justice owns the land, improvements and leaseholds
at 750 Kearny Street, San Francisco, California, known as the Hilton San
Francisco Financial District (the "Hotel"). The financial statements of Justice
have been consolidated with those of the Company, effective as of July 1, 2006.
See Note 1 to the Condensed Consolidated Financial Statements.
The Hotel is operated by the Partnership as a full service Hilton brand hotel
pursuant to a Franchise License Agreement with Hilton Hotels Corporation. The
term of the Agreement is for a period of 15 years commencing on January 12,
2006, with an option to extend the term for another five years, subject to
certain conditions. Justice also has a Management Agreement with Prism
Hospitality L.P. ("Prism") 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 Corporation ("Evon"), the managing general partner of Justice,
and from a lease with Tru Spa for a portion of the lobby level of the Hotel.
Portsmouth also receives management fees as a general partner of Justice for
its services in overseeing and managing the Partnership's assets. Those fees
are eliminated in consolidation.
-16-
Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31,
2007
The Company had a net loss of $1,900,000 for the three months ended March 31,
2008 compared to a net loss $265,000 for the three months ended March 31, 2007.
As discussed below, the increase in the net loss is primarily due to the
significant net losses on marketable securities partially offset by the
significant decrease in the loss from the hotel operations and the improvement
in the Company's real estate operations.
The loss from hotel operations was $580,000 for the three months ended March
31, 2008 on revenues of $8,779,000, compared to a loss of $1,666,000 for the
three months ended March 31, 2007 on revenues of $7,654,000. Depreciation and
amortization expenses were $1,105,000 and $1,042,000 for the respective
periods. The decrease in the loss was primarily attributable to greater income
generated from the operations of the Hotel during the third quarter and a
reduction in operating expenses as a percentage of revenues.
For the three months ended March 31, 2008, the operations of the Hotel on a
standalone basis generated operating income of approximately $816,000 on
operating revenues of approximately $8,337,000, compared to operating income of
approximately $500,000 on operating revenues of approximately $7,271,000 for
the three months ended March 31, 2007. That increase in Hotel operating income
is primarily due to a higher average daily room rate and an increase in
occupancy percentage.
The following table sets forth the average daily room rate, average occupancy
percentage and room revenue per available room ("RevPar") of the Hotel for the
three months ended March 31, 2008 and 2007.
Three Months Ended Average Average
March 31, Daily Rate Occupancy% RevPar
----------------- ---------- ---------- ---------
2008 $175.80 77.4% $136.09
2007 $164.42 70.6% $116.22
Average daily room rates and occupancy have continued to improve since the
Hotel's reopening in January 2006 as the Hotel approaches full stabilization
and gets further penetration into the Financial District hotel market. As a
result, the Hotel was able to achieve an approximately $20 increase in RevPar
for the three months ended March 31, 2008 compared the three months ended March
31, 2007. While we expect that operating revenues of the Hotel to continue to
grow, that growth will probably be at a slower pace. The Hotel's food and
beverage operations remain challenging, especially in the banquet and catering
department. Management will continue to focus in this area in an effort to
improve its operations.
With an uncertain economy and the possibility of a decline in business, group
and leisure travel, management will continue to focus on ways to improve
efficiencies and reduce operating costs and other expenses in its efforts to
increase the operating income of the Hotel. For the current quarter, we have
already seen an improvement in operating costs of the Hotel as a percentage
Hotel revenues as well as a reduction general and administrative costs at the
Partnership level for legal and consulting fees. If cash flows from the Hotel
operations continue to improve, the Partnership could make additional
distributions to its limited partners in fiscal 2008.
-17-
Real estate operations improved significantly to income of $216,000 for the
three months ended March 31, 2008 from a loss of $561,000 for the three months
ended March 31, 2007. The improvement was primarily attributable to the
increase in rental income. Rental income from the Company's properties located
outside of California increased by $394,000 while income from the Company's
California portfolio increased by $135,000. The increase in the rental income
from the properties located outside of California was primarily due to improved
occupancy and rental rates as the result of management's efforts to improve the
competitiveness of the Company's properties through interior and exterior
improvements. The overall rental market has also improved across the country.
The increase the rental income from the California real estate portfolio is
primary attributable to the significant increase in the occupancy of the
Company's newly renovated 30-unit apartment complex located in Los Angeles,
California and the improvement in the occupancy and rental rates in the Los
Angeles area.
During the three months ended March 31, 2008, the Company had listed for sale
its 249-unit apartment complex located in Austin, Texas and its 132-unit
apartment complex located in San Antonio, Texas for sale. The operations of
these properties are classified under discontinued operations in the condensed
consolidated statements of operations.
The Company had net losses on marketable securities of $2,345,000 for the three
months ended March 31, 2008 compared to net gains of $1,737,000 for the three
months ended March 31, 2007. For the three months ended March 31, 2008, the
Company had net realized gains of $422,000 and net unrealized losses of
$2,767,000. For the three months ended March 31, 2007, the Company had net
realized gains of $455,000 and net unrealized gains of $1,282,000. 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
results of operations. 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 three months ended March 31, 2008, the Company performed an
impairment analysis of its other investments and determined that two of its
investments had an other than temporary impairment and recorded an impairment
loss on other investments of $1,117,000. There was no impairment loss recorded
for the three months ended March 31, 2007.
Dividend and interest income decreased to $32,000 for the three months ended
March 31, 2008 from $98,000 for the three months ended March 31, 2007 primarily
as the result of the decrease in the investment in income yielding securities
during the most recent third quarter.
Margin interest and trading expenses decreased to $456,000 for the three months
ended March 31, 2008 from $577,000 for the three months ended March 31, 2007
primarily as the result of the decrease in margin interest expense to $71,000
from $192,000 due to the decrease in the average margin balance.
Minority interest related to Justice Investors decreased to $266,000 for the
three months ended March 31, 2008 from $879,000 for the three months ended
March 31, 2007. The decrease is due to the reduced loss from the hotel
operations to $580,000 for the three months ended March 31, 2008 from
$1,666,000 for the three months ended March 31, 2007.
-18-
The provision for income tax benefit increased to $1,697,000 for the three
months ended March 31, 2008 from $261,000 for the three months end March 31,
2007 primarily as the result of the higher pre-tax loss incurred during the
most recent third quarter.
Minority interest related to Portsmouth and Santa Fe increased to $697,000 for
the three months ended March 31, 2008 from $80,000 for the three months ended
March 31, 2007 primarily due to the higher loss incurred by Portsmouth and
Santa Fe during the most recent third quarter.
Nine Months Ended March 31, 2008 Compared to the Nine Months Ended March 31,
2007
The Company had a net loss of $290,000 for the nine months ended March 31, 2008
compared to a net loss $2,093,000 for the nine months ended March 31, 2007. As
discussed below, the significant decrease in the net loss is due to the large
gain recognized on the sale of real estate, the improvement in the real estate
operations and the reduction in the loss from the hotel operations, partially
offset by the loss from investment transactions.
The loss from hotel operations was $1,742,000 for the nine months ended March
31, 2008 compared to a loss of $3,431,000 for the nine months ended March 31,
2007. The decrease in the loss was primarily attributable to greater income
generated from the operations of the Hotel during the current period.
For the nine months ended March 31, 2008, the operations of the Hotel on a
standalone basis generated operating income of approximately $3,428,000 on
operating revenues of approximately $26,811,000, compared to operating income
of approximately $1,964,000 on operating revenues of approximately $22,013,000
for the nine months ended March 31, 2007. That increase in Hotel operating
income is primarily due to a higher average daily room rate and an increase in
occupancy percentage.
The following table sets forth the average daily room rate, average occupancy
percentage and room revenue per available room ("RevPar") of the Hotel for the
nine months ended March 31, 2008 and 2007.
Nine Months Ended Average Average
March 31, Daily Rate Occupancy% RevPar
----------------- ---------- ---------- ---------
2008 $174.49 83.8% $146.57
2007 $158.41 74.5% $118.42
Average daily room rates and occupancy have continued to improve since the
Hotel's reopening in January 2006 as the Hotel approaches full stabilization
and gets further penetration into the Financial District hotel market. As a
result, the Hotel was able to achieve an approximately $28 increase in RevPar
for the nine months ended March 31, 2008 compared the nine months ended March
31, 2007. While we expect that operating revenues of the Hotel to continue to
grow, that growth will probably be at a slower pace. The Hotel's food and
beverage operations remain challenging, especially in the banquet and catering
department. Management will continue to focus in this area in an effort to
improve its operations.
With an uncertain economy and the possibility of a decline in business, group
and leisure travel, management will continue to focus on ways to improve
efficiencies and reduce operating costs and other expenses in its efforts to
increase the operating income of the Hotel. We have already seen an
-19-
improvement, primarily in the last three months, in operating costs of the
Hotel as a percentage Hotel revenues as well as a reduction general and
administrative costs at the Partnership level for legal and consulting fees. If
cash flows from the Hotel operations continue to improve, the Partnership could
make additional distributions to its limited partners in fiscal 2008.
Real estate operations improved significantly to income of $496,000 for the
nine months ended March 31, 2008 from a loss of $1,864,000 for the nine months
ended March 31, 2007 primarily as the result of the increase in rental income
coupled with the decrease in property operating expenses.
Rental income from the Company's properties located outside of California
increased by $670,000 while income from the Company's California portfolio
increased by $632,000. The increase in the rental income from the properties
located outside of California was primarily due to improved occupancy and
rental rates as the result of management's efforts to improve the
competitiveness of the Company's properties through interior and exterior
improvements. The overall rental market has also improved across the country.
The increase the rental income from the California real estate portfolio is
primary attributable to the significant increase in the occupancy of the
Company's newly renovated 30-unit apartment complex located in Los Angeles,
California and the improvement in the occupancy and rental rates in the Los
Angeles area. Property operating expenses decreased to $3,586,000 for the nine
months ended March 31, 2008 from $4,549,000 for the nine months ended March 31,
2007 as the result of $560,000 in real estate related legal expenses incurred
during the nine months ended March 31, 2007 and management's overall effort to
reduce property operating expenses across the Company's entire real estate
portfolio and run the operations more efficiently.
During the nine months March 31, 2008, the Company had listed for sale its 249-
unit apartment complex located in Austin, Texas and its 132-unit apartment
complex located in San Antonio, Texas for sale. In August 2007, the Company
sold its 224-unit apartment complex located in Irving, Texas for $8,050,000 and
received net proceeds of approximately $3,665,000 after the payment of the
related mortgage of approximately $4,007,000. The Company recognized a gain
related to this sale of real estate of $4,074,000. The operations of these
three properties are classified under discontinued operations in the Condensed
Consolidated Statements of Operations.
The Company had net losses on marketable securities of $2,347,000 for the nine
months ended March 31, 2008 compared to net gains of $2,167,000 for the nine
months ended March 31, 2007. For the nine months ended March 31, 2008, the
Company had net realized gains of $533,000 and net unrealized losses of
$2,880,000. For the nine months ended March 31, 2007, the Company had net
realized gains of $2,753,000 and net unrealized losses of $586,000. 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
results of operations. 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 see the
Marketable Securities section below.
During the nine months ended March 31, 2008, the Company performed an
impairment analysis of its other investments and determined that two of its
investments had an other than temporary impairment and recorded an impairment
loss on other investments of $1,242,000. There was no impairment loss recorded
for the nine months ended March 31, 2007.
-20-
Dividend and interest income decreased to $144,000 for the nine months ended
March 31, 2008 from $245,000 for the nine months ended March 31, 2007 primarily
as the result of the decrease in the investment in income yielding securities
during the nine months ended March 31, 2008.
Margin interest and trading expenses decreased to $1,261,000 for the nine
months ended March 31, 2008 from $1,613,000 for the nine months ended March 31,
2007 primarily as the result of the decrease in margin interest expense to
$253,000 from $516,000 due to the decrease in the average margin balance.
Minority interest related to Justice Investors decreased to $801,000 for the
nine months ended March 31, 2008 from $1,714,000 for the nine months ended
March 31, 2007. The decrease is due to the reduced loss from the hotel
operations to $1,742,000 for the nine months ended March 31, 2008 from
$3,431,000 for the nine months ended March 31, 2007.
The provision for income tax benefit decreased to $864,000 for the nine months
ended March 31, 2008 from $1,672,000 for the nine months end March 31, 2007
primarily as the result of the lower pre-tax loss incurred during the nine
months ended March 31, 2008.
Minority interest related to Portsmouth and Santa Fe increased to $1,038,000
for the nine months ended March 31, 2008 from $326,000 for the nine months
ended March 31, 2007 primarily due to the higher loss incurred by Portsmouth
and Santa Fe during the most recent third quarter.
MARKETABLE SECURITIES
The Company's investment portfolio is diversified with 22 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 17.5% 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 March 31, 2008, the Company had investments in marketable equity
securities of $6,886,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
March 31, 2008.
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Insurance, banks and brokers $ 1,727,000 25.1%
Dairy products 1,203,000 17.5%
Technology 912,000 13.2%
Services 679,000 9.9%
REITs and builders 532,000 7.7%
Other 1,833,000 26.6%
------------ ----------
$ 6,886,000 100.0%
============ ==========
-21-
The following table shows the net gain or loss on the Company's marketable
securities and the associated margin interest and trading expenses for the
indicated periods.
For the three months ended March 31, 2008 2007
-------------- --------------
Net (losses)gains on marketable securities$ (2,345,000) $ 1,737,000
Impairment loss on other investments (1,117,000) -
Dividend & interest income 32,000 98,000
Margin interest expense (71,000) (192,000)
Trading and management expenses (385,000) (385,000)
------------ ------------
$ (3,886,000) $ 1,258,000
============ ============
For the nine months ended March 31, 2008 2007
-------------- --------------
Net (losses)gains on marketable securities $ (2,347,000) $ 2,167,000
Impairment loss on other investments (1,242,000) -
Dividend & interest income 144,000 245,000
Margin interest expense (253,000) (516,000)
Trading and management expenses (1,008,000) (1,097,000)
------------ ------------
$ (4,706,000) $ 799,000
============ ============
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from the hotel operations. The
Company also generates revenues from its real estate operations and from the
investment of its cash and marketable securities. Since the operations of the
Hotel were temporarily suspended on May 31, 2005, and significant amounts of
money were expended to renovate and reposition the Hotel as a Hilton, Justice
did not pay any partnership distributions until the end of March 2007. As a
result, the Company had to depend more on the revenues generated from its real
estate operations and the investment of its cash and marketable securities
during that transition period.
The Hotel started to generate cash flows from its operations in June 2006,
which have continued to improve since that time. As a result, Justice was able
to pay a special limited partnership distribution in a total amount of
$1,000,000 on March 28, 2007, of which Portsmouth received $500,000. The
general partners believed that operations of the Hotel had stabilized under the
Hilton brand and new management, and that cash flows were sufficient to warrant
that special distribution, especially with financings in place to meet any
additional capital needs. On October 1, 2007, Justice paid a second special
limited partnership distribution in the amount of $400,000 and an additional
special limited partnership distribution in the amount of $600,000 on November
23, 2007, of which Portsmouth received $200,000 and $300,000 respectively. The
general partners expect to conduct regular reviews to set the amount of any
future distributions that may be appropriate based on the results of operations
of the Hotel and other factors. If cash flows from the Hotel operations
continue to improve, the Partnership could be in a position to make additional
distributions to its limited partners in fiscal 2008.
To meet its substantial financial commitments for the renovation and transition
of the Hotel to a Hilton, Justice had to rely on borrowings to meet its
obligations. On July 27, 2005, Justice entered into a first mortgage loan
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with The Prudential Insurance Company of America in a principal amount of
$30,000,000 (the "Prudential Loan"). The term of the Prudential Loan is for 120
months at a fixed interest rate of 5.22% per annum. The Prudential Loan calls
for monthly installments of principal and interest in the amount of
approximately $165,000, calculated on a 30 year amortization schedule. The
Prudential 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 Prudential Loan is
without recourse to the limited and general partners of Justice. As of March
31, 2008, the Prudential Loan balance was approximately $28,854,000.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential
(the "Second Prudential Loan") in the principal amount of $19,000,000. The term
of the Second Prudential Loan is for approximately 100 months and matures on
August 5, 2015, the same date as the first Prudential Loan. The Second
Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for
monthly installments of principal and interest in the amount of approximately
$119,000, calculated on a 30-year amortization schedule. The Second Prudential
Loan is collateralized by a second 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 Second Prudential
Loan is without recourse to the limited and general partners of Justice. As of
March 31, 2008, the Second Prudential Loan balance was approximately
$18,803,000.
From the proceeds of the Second Prudential Loan, Justice retired its existing
line of credit facility with United Commercial Bank ("UCB") paying off the
outstanding balance of principal and interest of approximately $16,403,000 on
March 27, 2007. The Partnership also obtained a new unsecured $3,000,000
revolving line of credit facility from UCB to be utilized by the Partnership to
meet any emergency or extraordinary cash flow needs. The new line of credit
facility matures on February 2, 2009 and the annual interest rate is based on
an index selected by Justice at the time of advance, equal to the Wall Street
Journal Prime Rate or the LIBOR Rate plus 2%. As of March 31, 2008, there was a
balance of $650,000 drawn by Justice under the new line of credit, with an
annual interest rate at LIBOR plus two percent (4.75% as of March 2008).
Justice has also utilized $1,750,000 of the amount available under the line of
credit in the form of a standby letter of credit related to the Allied
Litigation. The annual fee for the letter of credit is one and one half percent
of $1,750,000, which fee is to be paid in quarterly installments for the
periods in which the letter of credit is in effect.
While the debt service requirements related to the two Prudential loans, as
well as any utilization of the UCB line of credit, may create some additional
risk for the Company and its ability to generate cash flows in the future since
the Partnership's assets had been virtually debt free for an number of years,
management believes that cash flows from the operations of the Hotel and the
garage lease will continue to be sufficient to meet all of the Partnership's
current and future obligations and financial requirements. Management also
believes that there is sufficient equity in the Hotel assets to support future
borrowings, if necessary, to fund any new capital improvements and other
requirements.
In April 2004, the Company obtained a revolving $5,000,000 line of credit
("LOC"). The LOC carries a variable interest rate(lender's base rate plus 1%).
Interest is paid on a monthly basis. As of March 31, 2008, the balance of the
LOC was $3,958,000 with the interest rate at 6.25%. In April 2008, the terms
of the LOC were modified to provide for an interest rate floor of 6.25%,
limited the LOC to the current balance of $3,958,000 and changed the LOC from
revolving to non-revolving with a maturity date of August 21, 2008.
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In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate
of $4,074,000. The Company received net proceeds after selling costs of
$7,739,000 and paid off the related outstanding mortgage note payable of
$4,007,000 and made a $3,000,000 payment to reduce its outstanding line of
credit to $1,258,000 from $4,258,000. In October 2007, the Company utilized
$2,700,000 of its line of credit for investments, increasing the outstanding
balance to $3,958,000 as of March 31, 2008.
In August 2007, the Company refinanced its $7,203,000 construction loan on its
30-unit apartment complex located in Los Angeles, California and obtained a
mortgage note payable in the amount of $6,850,000. The term of the note is 15
years, with interest only for the first two years. The interest is fixed at
5.97%.
During the nine months ended March 31, 2008, the Company made property
improvements in the aggregate amount of $3,666,000. 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.
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 consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows
generated from those assets and from its real estate operations, partnership
distributions and management fees, will be adequate to meet the Company's
current and future obligations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The Company does not have any material contractual obligations or commercial
commitments other than the mortgages of its rental properties, its line of
credit and Justice Investors' mortgage loans with Prudential and its revolving
line of credit facility with UCB.
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. Since Prism has the power and ability under the
terms of its management agreement to adjust hotel room rates on an ongoing
basis, 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.
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CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most significant to the
portrayal of our financial position and results of operations and require
judgments by management in order to make estimates about the effect of matters
that are inherently uncertain. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts in
our consolidated financial statements. We evaluate our estimates on an on-going
basis, including those related to the consolidation of our subsidiaries, to our
revenues, allowances for bad debts, accruals, asset impairments, other
investments, income taxes and commitments and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
The actual results may differ from these estimates or our estimates may be
affected by different assumptions or conditions.
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 Principal 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.
As discussed in Note 10, the Company had detected certain errors in the
calculation and presentation of the tax effects on the minority interest
related to Justice Investors in previously issued unaudited financial
statements for the periods ended December 31, 2006, March 31, 2007 and
September 30, 2007. As disclosed in Part I. Item 3 "Controls and Procedures" of
the Company's Quarterly Report on Form 10-QSB for the quarterly period ended
December 31, 2007 and its amendments to its Quarterly Reports on Form 10-QSB/A
for the quarterly periods ended March 31, 2007 and September 31, 2007, the
Company's management determined that there were material weaknesses in its
internal controls over financial reporting in the areas of accounting for
minority interest and tax provisions related to the consolidation of a
partnership entity. To address those material weaknesses, the Company has taken
the following steps to improve its internal controls and procedures over
financial reporting:
* The Company's tax consultants have reviewed and reconciled
the Company's tax position and tax accounts;
* The Company has engaged a separate tax consultant to review the
Company's tax provisions and tax consolidation processes on a
quarterly and annual basis;
* The Company has also engaged a consultant to review staffing
levels, job assignments, and processes to identify other process
weaknesses, if any, in order to mitigate the risk of reporting
errors.
Based upon such evaluation and the steps taken by the Company to address the
previously reported material weaknesses, the Company's management has concluded
that, as of the end of the period covered by this report, the Company's
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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.
Except for the affirmative changes discussed above, there have been no changes
in the Company's internal controls 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.
Management will continue to monitor internal control over financial reporting
and will modify or implement if necessary, any additional controls or
procedures that may be required to ensure the continued integrity of our
financial statements.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
Bacon Plumbing Co., Inc. and Golden Electric Company v. Allied Construction, et
al., San Francisco County Superior Court, Case No. 06-455401 (the "Allied
Litigation").
This is to update matters previously reported in the Company's Form 10-KSB for
its fiscal year ended June 30, 2007 and its reports on Form 10-QSB for the
quarter ended September 30, 2007, and December 30, 2007 regarding the
litigation and lien claims filed by Allied Construction Management, Inc.
("Allied") and eight subcontractors arising out of the renovation work
performed on the San Francisco hotel property.
As previously reported, Justice Investors entered into settlements with all of
the subcontractors that filed liens against the hotel property. The settlement
amounts were paid by Justice in November 2007 and the subcontractor liens were
released, leaving only the Allied lien claims to be determined. As a result of
the settlements with the subcontractors, the court also reduced the lien claim
of Allied from $2,061,544 to $1,166,649. The balance of the dispute between
Justice and Allied has been submitted to arbitration pursuant to the terms of
the construction contract. A hearing in that arbitration proceeding has now
been set to begin on June 16, 2008. Justice, Evon and Portsmouth dispute the
amounts alleged to be owed to Allied and intend to vigorously defend the
balance of this action.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
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(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
2008 Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
--------------------------------------------------------------------------------------
Month #1
(Jan. 1- 400 $18.05 400 21,823
Jan. 31)
--------------------------------------------------------------------------------------
Month #2
(Feb. 1- 500 $17.54 500 21,323
Feb. 28)
--------------------------------------------------------------------------------------
Month #3
(Mar. 1- 4,675 $17.29 4,675 16,648
Mar. 31)
--------------------------------------------------------------------------------------
Total 5,575 $17.37 5,575 16,648
--------------------------------------------------------------------------------------
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 Security Holders.
The Fiscal 2007 Annual Meeting of the Shareholders of the Company was held on
February 20, 2008 at the Hilton San Francisco Financial District, 750 Kearny
Street, San Francisco, California. At that meeting, Gary N. Jacobs and William
J. Nance were elected as Class B Directors, each to serve a three year term
expiring at the Fiscal 2010 Annual Meeting. Directors John V. Winfield, Josef
A. Grunwald and John C. Love 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 Burr, Pilger & Mayer LLP as
the Company's independent registered public accounting firm for the fiscal year
ending June 30, 2008. A tabulation of the vote follows:
Proposal (1) - Class B Directors: Votes For Withheld
--------- --------
Gary N. Jacobs 2,029,829 70,249
William J. Nance 2,066,536 33,642
Proposal (2) - Accountants: Votes For Against Abstained
--------- ------- ---------
Burr, Pilger & Mayer LLP 2,062,578 30,990 6,510
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Item 6. Exhibits.
(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 Principal 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 Principal Financial Officer Pursuant to 18
U.S.C. Section 1350.
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 8, 2008 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 8, 2008 by /s/ David Nguyen
------------------------------
David Nguyen, Treasurer
and Controller
(Principal Financial Officer)
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