UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
[ ] 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 registrant as specified in its charter)
DELAWARE 13-3293645
------------------------------ ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10940 Wilshire Blvd., Suite 2150, Los Angeles, California 90024
--------------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(310) 889-2500
-----------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (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. [x] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) [ ] Yes [x] No
INDEX
THE INTERGROUP CORPORATION
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets(Unaudited)
As of September 30, 2009 and June 30, 2009 3
Condensed Consolidated Statements of Operations(Unaudited)
For the Three Months ended September 30, 2009 and 2008 4
Condensed Consolidated Statements of Cash Flows(Unaudited)
For the Three months ended September 30, 2009 and 2008 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 4T. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits 26
SIGNATURES 27
-3-
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2009 June 30, 2009
------------------ -------------
ASSETS
Investment in hotel, net $ 43,946,000 $ 44,791,000
Investment in real estate, net 60,533,000 61,002,000
Properties held for sale 9,689,000 9,679,000
Investment in marketable securities 15,755,000 13,920,000
Other investments, net 7,217,000 6,567,000
Cash and cash equivalents 879,000 1,024,000
Restricted cash 1,641,000 1,598,000
Other assets, net 4,261,000 3,761,000
----------- -----------
Total assets $143,921,000 $142,342,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Liabilities
Accounts payable and other liabilities $ 11,522,000 $ 11,219,000
Due to securities broker 5,178,000 4,840,000
Obligations for securities sold 5,561,000 2,105,000
Line of credit 1,735,000 1,811,000
Mortgage notes payable - hotel 46,569,000 46,757,000
Mortgage notes payable - real estate 59,192,000 59,451,000
Mortgage notes payable - property held for sale 12,218,000 12,280,000
Deferred income taxes 2,161,000 2,839,000
----------- -----------
Total liabilities 144,136,000 141,302,000
----------- -----------
Commitments and contingencies
Shareholders' equity(deficit):
Preferred stock, $.01 par value, 100,000 shares
authorized; none issued - -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,283,097 and 3,216,653 issued; 2,394,109 and 2,327,665
Outstanding, respectively 33,000 32,000
Additional paid-in capital 9,030,000 8,959,000
Retained earnings 5,808,000 6,739,000
Treasury stock, at cost, 860,742 shares (9,564,000) (9,564,000)
----------- -----------
Total Intergroup shareholders' equity(deficit) 5,307,000 6,165,000
Noncontrolling interest (5,522,000) (5,126,000)
----------- -----------
Total shareholders' equity(deficit) (215,000) 1,040,000
----------- -----------
Total liabilities and shareholders' equity(deficit) $143,921,000 $142,342,000
=========== ===========
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 September 30, 2009 2008
----------- -----------
Revenues
Hotel $ 8,530,000 $ 9,299,000
Real estate 2,954,000 3,130,000
----------- -----------
Total revenues 11,484,000 12,429,000
----------- -----------
Costs and operating expenses
Hotel operating expenses (6,876,000) (7,242,000)
Real estate operating expenses (1,616,000) (1,602,000)
Depreciation and amortization expense (1,669,000) (1,682,000)
General and administrative expense (265,000) (381,000)
----------- -----------
Total costs and operating expenses (10,426,000) (10,907,000)
----------- -----------
Income from operations 1,058,000 1,522,000
----------- -----------
Other income(expense)
Interest expense (1,513,000) (1,549,000)
Net (loss)gain on marketable securities (1,322,000) 1,643,000
Impairment loss on other investments - (595,000)
Dividend and interest income 77,000 60,000
Trading and margin interest expense (376,000) (338,000)
----------- -----------
Net other expense (3,134,000) (779,000)
----------- -----------
Income(loss) before income taxes (2,076,000) 743,000
Income tax benefit(expense) 707,000 (269,000)
----------- -----------
Net (loss)income from continuing operations (1,369,000) 474,000
----------- -----------
Discontinued operations:
Income from discontinued operations 71,000 100,000
Provision for income tax expense (29,000) (41,000)
----------- -----------
Income from discontinued operations 42,000 59,000
----------- -----------
Net (loss)income (1,327,000) 533,000
Less: Net loss(income) attributable to the
noncontrolling interest 396,000 75,000
----------- -----------
Net (loss)income attributable to Intergroup $( 931,000) $ 608,000
=========== ===========
Net (loss)income per share from continuing operations
Basic $ (0.58) $ 0.20
Diluted $ (0.58) $ 0.17
Net income per share from discontinued operations
Basic $ 0.02 $ 0.03
Diluted $ 0.02 $ 0.02
Net (loss)income per share attributable to InterGroup
Basic $ (0.40) $ 0.26
Diluted $ (0.40) $ 0.22
Weighted average shares outstanding 2,347,528 2,347,853
=========== ===========
Diluted weighted average number of shares outstanding 2,397,303 2,721,353
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended September 30, 2009 2008
----------- -----------
Cash flows from operating activities:
Net loss $(1,327,000) $ 533,000
Adjustments to reconcile net (loss)income to
cash provided by operating activities:
Depreciation and amortization 1,669,000 1,682,000
Impairment loss on other investments - 595,000
Net unrealized loss(gain) on investments 1,470,000 (561,000)
Stock compensation expense 72,000 72,000
Changes in assets and liabilities:
Investment in marketable securities (3,305,000) 2,298,000
Other asset (502,000) (278,000)
Accounts payable and other liabilities 404,000 575,000
Due to securities broker 338,000 (886,000)
Obligation for securities sold 3,456,000 -
Deferred tax liability (678,000) 310,000
----------- -----------
Net cash provided by operating activities 1,597,000 4,340,000
----------- -----------
Cash flows from investing activities:
Investment in hotel (336,000) (471,000)
Investment in real estate (29,000) (166,000)
Other investments (650,000) (353,000)
Restricted cash (43,000) (58,000)
----------- -----------
Net cash used in investing activities (1,058,000) (1,048,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable - 500,000
Principal payments on mortgage notes payable (509,000) (468,000)
Paydown of line of credit (76,000) (3,475,000)
Payment to other notes payable (99,000) (203,000)
Distributions to minority partner - (425,000)
----------- -----------
Net cash used in financing activities (684,000) (4,071,000)
----------- -----------
Net decrease in cash and cash equivalents (145,000) (779,000)
Cash and cash equivalents at beginning of
period 1,024,000 1,906,000
----------- -----------
Cash and cash equivalents at end of period $ 879,000 $ 1,127,000
=========== ===========
Supplemental information:
Interest paid $ 1,692,000 $ 1,863,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
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 September 30, 2009, the Company had the power to vote 80% of the voting
shares 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 in 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 revenue is primarily generated through the management of its 68.8%
owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), a public company
(OTCBB: PRSI). InterGroup also directly owns approximately 11.7% of the common
stock of Portsmouth. Portsmouth has a 50.0% limited partnership interest in
Justice Investors, a California limited partnership ("Justice" or the
"Partnership") and serves as one of the two general partners. The other general
partner, Evon Corporation ("Evon") served as the managing general partner until
December 1, 2008. As further discussed in Note 2, the Limited Partnership
Agreement was amended, effective December 1, 2008, to provide for a change in
the respective roles of the general partners. Pursuant to that amendment,
Portsmouth became the Managing General Partner of Justice while Evon assumed
the role of Co-General Partner of Justice. The financial statements of Justice
are consolidated with those of the Company.
Justice owns a 544-room hotel property located at 750 Kearny Street, San
Francisco California, now known as the Hilton San Francisco Financial District
(the "Hotel") and related facilities including a five level underground parking
garage. The Hotel is operated by the partnership as a full service Hilton brand
hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation.
Justice also has a Management Agreement with Prism Hospitality L.P. (Prism) to
perform the day-to-day management functions of the Hotel.
Justice leased the parking garage to Evon through September 30, 2008.
Effective October 1, 2008, Justice and Evon entered into an Installment Sale
Agreement whereby Justice purchased all of Evon's right, title, and interest in
the remaining term of its lease of the parking garage, which was to expire on
November 30, 2010, and other related assets. Justice also agreed to assume
Evon's contract with Ace Parking Management, Inc. ("Ace Parking") for the
management of the garage and any other liabilities related to the operation of
the garage commencing October 1, 2008. The Partnership also leases a day spa
on the lobby level to Tru Spa. 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.
-6-
In addition to the operations of the Hotel, the Company also generates income
from the ownership of real estate. Properties include apartment complexes,
commercial real estate, and two single-family houses as strategic investments.
The properties are located throughout the United States, but are concentrated
in Texas and Southern California. The Company also has investments in
unimproved real property. All of the Company's residential rental properties
in California are managed by professional third party property management
companies and the rental properties outside of California are managed by the
Company.
Certain prior period balances have been reclassified to conform with the
current period presentation.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and the notes therein included in the Company's
Form 10-K/A for the year ended June 30, 2009.
The results of operations for the three months September 30, 2009, are not
necessarily indicative of results to be expected for the full fiscal year
ending June 30, 2010.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles,
which was primarily codified into Accounting Standards Codification (ASC) Topic
105. This standard will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification was effective for interim or annual financial periods ended after
September 15, 2009. The Company adopted ASC 105 beginning this quarter ended
September 30, 2009. The adoption of ASC 105 did not have a material impact on
our consolidated financial position, results of operations and cash flows.
Additionally, the FASB now uses Accounting Standards Updates (ASU) to amend
ASC.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167), which has not yet been codified in the ASC. This guidance
is a revision to pre-existing guidance pertaining to the consolidation and
disclosures of variable interest entities. Specifically, it changes how a
reporting entity determines when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated.
The determination of whether a reporting entity is required to consolidate
another entity is based on, among other things, the other entity's purpose and
design and the reporting entity's ability to direct the activities of the other
entity that most significantly impact the other entity's economic performance.
This guidance will require a reporting entity to provide additional disclosures
about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. A reporting entity will be
required to disclose how its involvement with a variable interest entity
affects the reporting entity's financial statements. This guidance will be
effective at the start of a reporting entity's first fiscal year beginning
after November 15, 2009. Early application is not permitted. The Company is
currently evaluating the impact on our financial statements, if any, upon
adoption.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was
primarily codified into ASC Topic 855. The Company adopted ASC Topic 855 which
requires an entity to recognize in the financial statements the effects of all
subsequent events that provide additional evidence about conditions that
existed at the date of the balance sheet. For non-recognized subsequent events
-7-
that must be disclosed to keep the financial statements from being misleading,
an entity will be required to disclose the nature of the event as well as an
estimate of its financial effect, or a statement that such an estimate cannot
be made. In addition, ASC Topic 855 requires an entity to disclose the date
through which subsequent events have been evaluated. ASC Topic 855 is
consistent with current practice and did not have any impact on the Company's
consolidated financial statements. Subsequent events were evaluated through the
date the condensed and consolidated financial statements were issued, which was
November 13, 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements-an amendment of ARB No. 51" which was
primarily codified into ASC Topic 810, "Consolidation." ASC Topic 810 states
that accounting and reporting for minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. This standard
also establishes reporting requirements that provide disclosures that identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. ASC Topic 810 required retroactive adoption of the
presentation and disclosure requirements for previously existing minority
interests. All other requirements are to be applied prospectively. This
standard is effective for fiscal years beginning after December 15, 2008. The
Company adopted the provisions beginning July 1, 2009. Prior to adopting this
standard, the Company absorbed 100% of the net loss and accumulated deficit of
Justice Investors as of June 30, 2009. Under ASC Topic 810, losses
attributable to the parent and the noncontrolling interest in a subsidiary
shall be attributed to those interests. That is, the noncontrolling interest
shall continue to be attributed its share of losses even if that attribution
results in a deficit noncontrolling interest balance. As a result, upon
adoption, the Company recalculated the net accumulated deficit pertaining to
noncontrolling interest totaling $5,125,000 as of June 30, 2009 and
reclassified such amount as a separate component of the shareholders' equity.
The Company also recalculated the net loss attributed to noncontrolling
interest totaling $75,000 for the three months ended September 30, 2008 and
reclassified such amount as a separate line in the condensed statement of
operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
which was primarily codified into ASC Topic 825, "Financial Instruments." ASC
Topic 825 provides entities with an irrevocable option to report selected
financial assets and financial liabilities at fair value. It also establishes
presentation and disclosure requirements that are designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. The Company adopted ASC Topic 825 on
July 1, 2008 and chose not to elect the fair value option for its financial
assets and liabilities that had not been previously carried at fair value.
Therefore, material financial assets and liabilities not carried at fair value,
such as other assets, accounts payable, line of credit, and mortgage payables
are reported at their carrying values.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations",
which was primarily codified into ASC Topic 805, "Business Combinations". It
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. This standard is to be
-8-
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 adopted this standard beginning July 1, 2009 and adoption of this
standard had no material impact on the Company's consolidated financial
statements.
Properties held for sale - Discontinued Operations
Properties are classified as held for sale when management commits to a plan to
sell the asset, the asset is available for immediate sale, an active program to
locate a buyer has been initiated, the sale of the asset is probable, the sale
of the asset is actively marketed and it is unlikely that significant changes
to the sale plan will be made or withdrawn. As of September 30, 2009, the
Company had three properties classified as held for sale in accordance with
SFAS No. 144, which requires that depreciation on these properties be stopped.
Under the provisions of the SFAS No.144, Accounting for Impairment or Disposal
of Long-Lived Assets, which was primarily codified into ASC Topic 205-20
"Presentation of Financial Statements - Discontinued Operations, for properties
disposed of during the year or for properties for which the Company actively
markets for sale at a price that is reasonable in relation to its market value,
the properties are required to be classified as held for sale on the balance
sheet and 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 months ended
September 30, 2009 and 2008 and reported as income from discontinued operations
in the consolidated statements of operations.
Earnings Per Share
Basic 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 income(loss) 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 and restricted stock units. As of September 30, 2009, the Company had
15,000 stock options and 34,775 restricted stock units that were considered
potentially dilutive common shares and As of September 30, 2008, the Company
had 373,500 stock options that were considered potentially dilutive common
shares. No restricted stock units were issued as of September 30, 2008.
-9-
NOTE 2 - INVESTMENT IN HOTEL, NET
Hotel property and equipment consisted of the following:
Accumulated Net Book
As of September 30, 2009 Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 17,214,000 (12,094,000) 5,120,000
Building and improvements 54,242,000 (18,154,000) 36,088,000
------------ ------------ ------------
$ 74,194,000 $(30,248,000) $ 43,946,000
============ ============ ============
Accumulated Net Book
As of June 30, 2009 Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 15,964,000 (11,262,000) 4,702,000
Building and improvements 55,241,000 (17,890,000) 37,351,000
------------ ------------ ------------
$ 73,943,000 $(29,152,000) $ 44,791,000
============ ============ ============
NOTE 3 - INVESTMENT IN REAL ESTATE, NET
Investment in real estate included the following:
September 30, 2009 June 30, 2009
------------------ -------------
Land $ 23,595,000 $ 23,595,000
Buildings, improvements and equipment 59,351,000 59,330,000
Accumulated depreciation (22,413,000) (21,923,000)
---------- ----------
$ 60,533,000 $ 61,002,000
========== ==========
NOTE 4 - PROPERTY HELD FOR SALE AND DISCONTINUED OPERATIONS
As of September 30, 2009, the Company had listed for sale its 249-unit
apartment building located in Austin, Texas, its 132-unit apartment located in
San Antonio, Texas and its 24-unit apartment located in Los Angeles, California
(all three were classified as Held for Sale on the balance sheet). Under the
provisions of the SFAS 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 three properties have been reclassified from continuing operations for
the three months ended September 30, 2009 and 2008 and are reported as income
from discontinued operations in the consolidated statements of operations.
-10-
The revenues and expenses from the operation of these three properties during
the three months ended September 30, 2009 and 2008, are summarized as follows:
For the three months ended September 30, 2009 2008
---------- ----------
Revenues $ 694,000 $ 753,000
Expenses (623,000) (653,000)
---------- ----------
Income $ 71,000 $ 100,000
========== ==========
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.
At September 30, 2009, all of the Company's marketable securities are
classified as trading securities. The change in the unrealized gains and
losses on these investments are included in earnings. Trading securities are
summarized as follows:
Gross Gross Net Fair
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- -----------
As of September 30, 2009
Corporate
Equities $ 10,294,000 $6,845,000 ($1,384,000) $5,461,000 $15,755,000
As of June 30, 2009
Corporate
Equities $ 8,170,000 $7,075,000 ($1,325,000) $5,750,000 $13,920,000
As of September 30, 2009 and June 30, 2009, the Company had unrealized losses
of $758,000 and $968,000, respectively, related to securities held for over one
year.
Net gain(loss) on marketable securities on the statement of operations is
comprised of realized and unrealized gains(losses). Below is the composition
of the net gain(loss) for the three months ended September 30, 2009 and 2008,
respectively.
For the three months ended September 30, 2009 2008
----------- -----------
Realized gain on marketable securities $ 148,000 $ 1,082,000
Unrealized (loss)gain on marketable securities (1,470,000) 561,000
----------- -----------
Net (loss)income on marketable securities $(1,322,000) $ 1,643,000
=========== ===========
-11-
NOTE 6 - OTHER INVESTMENTS
The Company may also invest, with the approval of the Securities Investment
Committee, in private investment equity funds and other unlisted securities,
such as convertible notes through private placements. Those investments in non-
marketable securities are carried at cost on the Company's balance sheet as
part of other investments net of other than temporary impairment losses.
As of September 30, 2009 and June 30, 2009, the Company had net other
investments of $7,217,000 and $6,567,000, respectively, which consist of the
following:
Type September 30, 2009 June 30, 2009
--------------------------- ----------------- ----------------
Private equity hedge fund $ 5,517,000 $ 5,517,000
Corporate debt instruments 1,000,000 750,000
Other 700,000 300,000
----------------- ----------------
$ 7,217,000 $ 6,567,000
================= ================
During the three months ended September 30, 2009 and 2008, the Company recorded
impairment losses on other investments of $0 and $595,000, respectively.
NOTE 7 - FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which was primarily codified into ASC Topic 820, which
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. ASC Topic 820 is effective
as of the beginning of the Company's 2009 fiscal year. In February 2008, the
FASB deferred the effective date of ASC Topic 820 for non-financial assets and
liabilities that are recognized or disclosed at fair value on a nonrecurring
basis until the beginning of fiscal year 2010. The Company adopted ASC Topic
820 with respect to financial assets and liabilities on July 1, 2008. There
was no material effect on the financial statements upon adoption of this new
accounting pronouncement.
ASC Topic 820 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow), and the cost approach (cost to replace the service capacity of
an asset or replacement cost). The statement utilizes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels:
Level 1: Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs, other than quoted prices, that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for
similar assets or liabilities in active markets and quoted prices for identical
or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity's own
assumptions
-12-
The assets measured at fair value on a recurring basis as of September 30, 2009
are as follows:
Assets: Level 1 Level 2 Level 3 September 30, 2009
----------- ----------- ------- ------- ------------------
Cash $ 879,000 $ - $ - $ 879,000
Restricted cash 1,641,000 - - 1,641,000
Investment in marketable securities 15,755,000 - - 15,755,000
----------- ------- ------- -------------
$18,275,000 $ - $ - $ 18,275,000
=========== ======= ======= =============
The fair values of investments in marketable securities are determined by the
most recently traded price of each security at the balance sheet date.
Financial assets that are measured at fair value on a non-recurring basis and
are not included in the tables above include "Other investments in non-
marketable securities," that were initially measured at cost and have been
written down to fair value as a result of impairment. The following table shows
the fair value hierarchy for these assets measured at fair value on a non-
recurring basis as of September 30, 2009:
Loss for the
three months ended
Assets: Level 1 Level 2 Level 3 September 30, 2009 September 30, 2009
----------- ------- ------- --------- ------------------ ------------------
Other non-marketable investments $ - $ - $7,217,000 $7,217,000 $ 0
Other investments in non-marketable securities are carried at cost net of any
impairment loss. The Company has no significant influence or control over the
entities that issue these investments. These investments are reviewed on a
periodic basis for other-than-temporary impairment. The Company reviews several
factors to determine whether a loss is other-than-temporary. These factors
include but are not limited to: (i) the length of time an investment is in an
unrealized loss position, (ii) the extent to which fair value is less than
cost, (iii) the financial condition and near term prospects of the issuer and
(iv) our ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in fair value.
NOTE 8 - LINE OF CREDIT
The Partnership has a $2,500,000 unsecured revolving line of credit facility
with a bank that matures on February 2, 2010. Borrowings under the line of
credit bear interest at Prime plus 3.0% per annum or based on the Wall Street
Journal Prime Rate (3.25%) plus 3.0% per annum, floating, (but subject to a
minimum floor rate at 5.0% per annum). The interest rate at September 30, 2009
was 6.25%. The outstanding balance on the line of credit was $1,735,000 and
$1,811,000 as of September 30, 2009 and June 30, 2009, respectively.
Borrowings under the line of credit are subject to certain financial covenants,
which are measured annually at June 30th and December 31st based on the credit
arrangement. The Partnership was not in compliance with the financial
covenants as of June 30, 2009. The Partnership received a waiver of such non-
compliance from the bank on September 16, 2009.
-13-
NOTE 9 - TERMINATION OF GARAGE LEASE
Effective October 1, 2008, Justice and Evon entered into an Installment Sale
Agreement whereby Justice purchased all of Evon's right title and interest in
the remaining term of its lease of the parking garage, which was to expire on
November 30, 2010, and other related assets. Justice also agreed to assume
Evon's contract with Ace Parking for the management of the garage and any other
liabilities related to the operation of the garage commencing October 1, 2008.
The purchase price for the garage lease and related assets was approximately
$755,000, payable in one down payment of approximately $28,000 and 26 equal
monthly installments of approximately $29,000, which includes interest at the
rate of 2.4% per annum. Future installment payments as of September 30, 2009
are as follows:
For the year ending June 30,
2010 258,000
2011 144,000
--------
Total $402,000
========
As of September 30, 2009, the present value of the liability of $402,000 was
included in the accounts payable and other liabilities balance of $11,523,000
on the Company's condensed consolidated balance sheet.
NOTE 10 - STOCK BASED COMPENSATION PLANS
The Company follows the Statement of Financial Accounting Standards 123
(Revised), "Share-Based Payments" ("SFAS No. 123R"), which was primarily
codified into ASC Topic 718 "Compensation - Stock Compensation", which
addresses accounting for equity-based compensation arrangements, including
employee stock options and restricted stock units. Under ASC Topic 718,
compensation expense is recognized using the fair-value based method for all
new awards granted after July 1, 2006. No stock options were issued by the
Company after July 1, 2006. Additionally, compensation expense for unvested
stock options that are 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.
On December 7, 2008, the Company's 1998 Stock Option Plan for Key Officers and
Employees expired; however, any outstanding options issued under that plan
remain effective in accordance with their terms. Previously, the Company's 1998
Stock Option Plan for Non-Employee Directors was terminated upon shareholder
approval, and Board adoption, of the 2007 Stock Compensation Plan for Non-
Employee Directors; however, any outstanding options under that plan remained
effective in accordance with their terms. Those stock compensation plans are
more fully described in Note 17 of the Company's Form 10-K/A for the fiscal
year ended June 30, 2009.
On December 3, 2008, the Board of Directors of the Company adopted, subject to
shareholder approval, a new equity compensation plan for its officers,
directors and key employees entitled, The InterGroup Corporation 2008
Restricted Stock Unit Plan (the " RSU Plan"). The Plan was adopted, in part, to
replace the stock option plans that expired on December 7, 2008. The Plan was
approved by shareholders at the Company's Annual Meeting of Shareholders on
February 18, 2009.
-14-
The RSU Plan authorizes the Company to issue restricted stock units ("RSUs") as
equity compensation to officers, directors and key employees of the Company on
such terms and conditions established by the Compensation Committee of the
Company. RSUs are not actual shares of the Company's common stock, but rather
promises to deliver common stock in the future, subject to certain vesting
requirements and other restrictions as may be determined by the Committee.
Holders of RSUs have no voting rights with respect to the underlying shares of
common stock and holders are not entitled to receive any dividends until the
RSUs vest and the shares are delivered. No awards of RSUs shall vest until at
least six months after shareholder approval of the RSU Plan on February 18,
2009. Subject to certain adjustments upon changes in capitalization, a maximum
of 200,000 shares of the common stock are available for issuance to
participants under the RSU Plan. The RSU Plan will terminate ten (10) years
from December 3, 2008, unless terminated sooner by the Board of Directors.
After the RSU Plan is terminated, no awards may be granted but awards
previously granted shall remain outstanding in accordance with the Plan and
their applicable terms and conditions.
Under the RSU Plan, the Compensation Committee also has the power and authority
to establish and implement an exchange program that would permit the Company to
offer holders of awards issued under prior shareholder approved compensation
plans to exchange certain options for new RSUs on terms and conditions to be
set by the Committee. The exchange program is designed to increase the
retention and motivational value of awards granted under prior plans. In
addition, by exchanging options for RSUs, the Company will reduce the number of
shares of common stock subject to equity awards, thereby reducing potential
dilution to stockholders in the event of significant increases in the value of
its common stock.
Pursuant to an exchange offer authorized by the Compensation Committee, a total
of 5,812 RSUs were issued to four holders of Non-Employee Director stock
options in exchange for a total of 36,000 stock options which were surrendered
to the Company on December 7, 2008. The number of RSUs issued was determined by
multiplying the number of options that were surrendered by the difference
between the exercise price of the options surrendered ($8.00) and the closing
price of the Company's common stock on December 5, 2008 of $9.54, with that
product divided by the closing price of the common stock on December 5, 2009.
No additional compensation expense was recognized related to the exchange as
the fair market value of the options immediately prior to the exchange,
approximated the fair value of the RSUs on the day of issuance. In August
2009, the 5,812 RSUs vested and the Company issued common stock.
Pursuant to a further exchange offer authorized by the Compensation Committee,
a total of 4,775 RSUs were issued to five holders of Non-Employee Director
stock options in exchange for a total of 15,000 stock options which were
surrendered to the Company on June 30, 2009. The number of RSUs issued was
determined by multiplying the number of options that were surrendered by the
difference between the exercise price of the options surrendered ($8.17) and
the closing price of the Company's common stock on June 30, 2009 of $11.99,
with that product divided by the closing price of the common stock on June 30,
2009. No additional compensation expense was recognized related to the exchange
as the fair market value of the options immediately prior to the exchange,
approximated the fair value of the RSUs on the day of issuance. The 4,775 RSUs
issued pursuant to that exchange offer vest on January 7, 2010.
On December 15, 2008, the Compensation Committee authorized a similar exchange
offer to the Company's Chief Executive Officer ("CEO"), respecting 225,000
stock options issued to him under the 1998 Key Officer and Employee Plan that
-15-
were to expire on December 21, 2008. Pursuant to that exchange offer, the
Company's CEO surrendered his 225,000 options to the Company on December 21,
2008 in exchange for 84,628 RSUs. The number of RSUs issued was based on an
exercise price of the options surrendered of $7.917 and the closing price of
the Company's common stock on December 19, 2008 of $12.69, using the same
formula as the exchange offer to the holders of the Non-Employee Director
options. No additional compensation expense was recognized related to the
exchange as the fair market value of the options immediately prior to the
exchange, approximated the fair value of the RSUs on the day of issuance. In
September 2009, 54,628 RSUs vested and the Company issued common stock. No
stock compensation was recognized as compensation expense for this conversion
as they were previously calculated at the grant date under the pro-forma
disclosures of SFAS 123.
The table below summarizes the RSUs granted and outstanding.
Number of RSUs
--------------
RSUs outstanding as of June 30, 2009 95,215
Granted -
Converted to common stock (60,440)
--------------
RSUs outstanding as of September 30, 2009 34,775
==============
The following table summarizes the stock options outstanding as of September
30, 2009:
Number of Weighted-average
Shares Exercise Price
---------- ---------------
Outstanding at June 30, 2009 102,000 $12.47
Granted - -
Exercised - -
Forfeited - -
Exchanged - -
---------- ---------------
Outstanding at September 30, 2009 102,000 $12.47
========== ===============
Exercisable at September 30, 2009 99,750 $12.15
========== ===============
The range of exercise prices for the outstanding and exercisable options as of
September 30, 2009 are as follows:
Number of Range of Weighted Average Weighted Average
Options Exercise Price Exercise Price Remaining Life
--------- -------------- ---------------- ----------------
Outstanding options 102,000 $8.17-$18.00 $ 12.47 2.90 years
Exercisable options 99,750 $8.17-$18.00 $ 12.15 2.94 years
-16-
NOTE 11 - SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel
("Hotel Operations"), the operation of its multi-family residential properties
("Real Estate Operations") and the investment of its cash in marketable
securities and other investments("Investment Transactions"). 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 months ended
September 30, 2009 and 2008. Operating income(loss) from hotel operations
consist of the operation of the hotel and operation of the garage. Operating
income for rental properties consist of rental income. Operating income for
investment transactions consist of net investment gain(loss) and dividend and
interest income.
As of and for the
Three months ended Hotel Real Estate Investment Discontinued
September 30, 2009 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $ 8,530,000 $ 2,954,000 $ - $ - $ 11,484,000 $ 694,000 $ 12,178,000
Operating expenses (8,058,000) (2,104,000) - (264,000) (10,426,000) (444,000) (10,870,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Income(loss)from operations 472,000 850,000 - (264,000) 1,058,000 250,000 1,308,000
Interest expense (713,000) (800,000) - - (1,513,000) (179,000) (1,692,000)
Depreciation and
amortization expense - - - - - - -
Income(loss)
from investments - - (1,621,000) - (1,621,000) - (1,621,000)
Income tax benefit(expense) - - - 707,000 707,000 (29,000) 678,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (241,000) $ 50,000 $(1,621,000) $ 443,000 $ (1,369,000) $ 42,000 $ (1,327,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $43,946,000 $60,533,000 $22,972,000 $ 6,781,000 $134,232,000 $ 9,689,000 $143,921,000
=========== =========== =========== =========== ============ ============ ============
As of and for the
Three months ended Hotel Real Estate Investment Discontinued
September 30, 2008 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $ 9,299,000 $ 3,130,000 - $ - $ 12,429,000 $ 753,000 $ 13,182,000
Operating expenses (8,931,000) (2,317,000) - (381,000) (11,449,000) (471,000) (11,920,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Income(loss)from operations 368,000 993,000 - (381,000) 980,000 282,000 1,262,000
Interest expense (177,000) (830,000) - - (1,007,000) (182,000) (1,189,000)
Income from investments - - 770,000 - 770,000 - 770,000
Depreciation and
amortization expense - - - - - - -
Income tax benefit(expense) - - - (269,000) (269,000) (41,000) (310,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ 191,000 $ 163,000 $ 770,000 $ (650,000) $ 474,000 $ 59,000 $ 533,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $47,446,000 $62,335,000 $12,035,000 $ 6,340,000 $128,156,000 $ 9,642,000 $137,798,000
=========== =========== =========== =========== ============ ============ ============
-17-
NOTE 12 - RELATED PARTIES
Four of the Company's Directors serve as directors of InterGroup and three of
the Company's Directors serve as directors of Santa Fe.
Evon, a general partner of Justice, was the lessee of the parking garage until
September 30, 2008. Under the terms of the lease agreement, Evon paid the
Partnership rent of $399,000 for the three months ended September 2008. As
discussed in Note 9, Justice and Evon entered into an installment sale
agreement whereby Justice purchased the remaining term of the lease agreement
and related assets for a total of approximately $755,000.
During the three months ended September 30, 2009, the Company received
management fees from Justice Investors totaling $78,000 and $45,000,
respectively. These amounts were eliminated in consolidation.
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.
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 national and worldwide economic conditions,
including the impact of recessionary conditions on tourism, travel and the
lodging industry, the impact of terrorism and war on the national and
international economies, including tourism and securities markets, energy and
fuel costs, natural disasters, general economic conditions and competition in
the hotel industry in the San Francisco area, seasonality, labor relations and
labor disruptions, actual and threatened pandemics such as swine flu,
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-K for the fiscal year ended June 30, 2009, 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.
RECENT DEVELOPMENTS
Effective October 1, 2009, the Company leased its 5,503 square foot office
building located at 820 Moraga Drive, Los Angeles, CA 90049, which served as
the its principal executive office. The term of the lease is for five year
lease at an initial base monthly base rent of $3.00 per square foot, with a
tenant option to extend the term for another five years.
-18-
Concurrent with the leasing of its Moraga office building, the Company leased a
smaller 2,915 square foot office space located at 10940 Wilshire Blvd, Suite
2150, Los Angeles, CA 20024 to serve as its new principal executive office. The
Wilshire office lease is for an initial term of seven years at a monthly base
rent of $2.75 per square foot with an option to extend the term for an
additional three years. The downsizing of the Company's office space is
expected to result in savings of administrative costs.
RESULTS OF OPERATIONS
The Company's principal business is conducted through Portsmouth's general and
limited partnership interest in the Justice Investors limited partnership
("Justice" or the "Partnership"). Portsmouth has a 50.0% limited partnership
interest in Justice and serves as the managing general partner of Justice. Evon
Corporation ("Evon") serves as the other general partner. 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.
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 license 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.
Until September 30, 2008, the Partnership also derived income from the lease of
the parking garage to Evon. Effective October 1, 2008, Justice entered into an
installment sale agreement with Evon to purchase the remaining term of the
garage lease and related garage assets, and assumed the contract with Ace
Parking for the operations of the garage. Justice also leases a portion of the
lobby level of the Hotel to a day spa operator. 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.
In addition to the operations of the Hotel, the Company also generates income
from the ownership of real estate. Properties include apartment complexes,
commercial real estate, and two single-family houses as strategic investments.
The properties are located throughout the United States, but are concentrated
in Texas and Southern California. The Company also has investments in
unimproved real property. All of the Company's residential rental properties
in California are managed by professional third party property management
companies and the rental properties outside of California are managed by the
Company.
The Company acquires its investments in real estate and other investments
utilizing cash, securities or debt, subject to approval or guidelines of the
Board of Directors. The Company also invests in income-producing instruments,
equity and debt securities and will consider other investments if such
investments offer growth or profit potential.
-19-
Three Months Ended September 30, 2009 Compared to the Three Months Ended
September 30, 2008
The Company had a net loss of $931,000 for the three months ended September 30,
2009 compared to net income of $608,000 for the three months ended September
30, 2008. The net loss attributed to the Company was $1,327,000 and net income
attributed to the Company was $533,000 for the three months ended September 30,
2009 and 2008, respectively. The net loss attributed to the noncontrolling
interest was $396,000 and the net income attributable to the noncontrolling
interest was $75,000 for the three months ended September 30, 2009 and 2008,
respectively. The change to a net loss in the most recent quarter from net
income in the comparable quarter was primarily attributable to the increase in
the net loss from hotel operations and the increase in the net loss on
marketable securities in the most recent quarter.
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended September 30, 2009 and 2008.
For the three months ended September 30, 2009 2008
---------- ----------
Hotel revenues:
Hotel rooms $ 6,732,000 $ 7,588,000
Food and beverage 951,000 1,259,000
Garage 668,000 399,000
Other 179,000 53,000
---------- ----------
Total hotel revenues 8,530,000 9,299,000
Operating expenses, excluding interest, depreciation and
amortization (6,876,000) (7,242,000)
---------- ----------
Operating income before interest expense, depreciation and
amortization 1,654,000 2,057,000
Interest expense (713,000) (719,000)
Depreciation and amortization expense (1,182,000) (1,147,000)
---------- ----------
Income (loss) from hotel operations $ (241,000) $ 191,000
========== ==========
For the three months ended September 30, 2009, the Hotel generated operating
income of approximately $1,654,000 before interest, depreciation and
amortization, on operating revenues of approximately $8,530,000 compared to
operating income of approximately $2,057,000 before interest, depreciation and
amortization, on operating revenues of approximately $9,299,000 for the three
months ended September 30, 2008. The decrease in Hotel operating income is
primarily attributable to the decrease in room and food and beverage revenues
in the current period, partially offset by an increase in garage revenues due
to the termination of the garage lease effective October 1, 2008 and the
integration of those operations into those of the Hotel.
Room revenues decreased by approximately $856,000 for the three months ended
September 30, 2009 when compared to the three months ended September 30, 2008
and food and beverage revenues decreased by approximately $308,000 for the same
period. The decrease in room revenues was primarily attributable to a decline
in average daily room rates as hotels in the San Francisco market began to
reduce room rates beginning in October 2008 in an effort to maintain occupancy
levels in an increasingly more competitive market as economic conditions
deteriorated. The decrease in food and beverage revenues is primarily
attributable to decline in banquet and catering business as companies
dramatically cut back on business travel, corporate meetings and events.
-20-
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 September 30, 2009 and 2008.
Three Months Ended Average Average
September 30, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2009 $147 92% $135
2008 $187 81% $152
The operations of the Hotel continued to be impacted by the significant
downturn in the domestic and international economies and markets. The Hotel's
average daily room rate was approximately $39 lower for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008.
However, due to increased sales and marketing efforts in the face of difficult
economic conditions and greater competition, the Hotel was able to boost
occupancy rates by approximately 11% over the comparable period. As a result,
the Hotel was able to achieve a RevPar number that was near the top of its
competitive set.
Management has also continued to focus on ways to improve efficiencies and
reduce operating costs and other expenses in its efforts to stabilize and
maintain operating income of the Hotel. The Hotel's management company has
added support to those efforts by agreeing to reduce its management fees by
fifty percent for the 2009 calendar year. As a result, we have seen further
reductions in operating costs of the Hotel for the three months ended September
30, 2009 despite maintaining higher occupancy levels. Management will also
continue to explore new and innovative ways to improve operations and enhance
the guest experience.
The Company had real estate revenues of $2,954,000 for the three months ended
September 30, 2009 compared with revenues of $3,130,000 for the three months
ended September 30, 2008. The decline in rental revenues is as the result of
operating in a tougher economy. Real estate operating expenses remained
consistent between the two periods. Interest expense decreased to $800,000
from $830,000 as the result of the Company reducing interest rates through
refinancing certain properties over the past twelve months. Management
continues to review and analyze the Company's real estate operations to improve
occupancy and rental rates, reduce expenses and improve efficiencies.
As of September 30, 2009, the Company had listed for sale its 249-unit
apartment building located in Austin, Texas, its 132-unit apartment located in
San Antonio, Texas and its 24-unit apartment located in Los Angeles,
California. These properties are classified as held for sale on the Company's
condensed consolidated balance sheet with the operations of these properties
classified under discontinued operations in the condensed consolidated
statements of operations.
The Company had a net loss on marketable securities of $1,322,000 for the three
months ended September 30, 2009 compared to a gain of $1,643,000 for the three
months ended September 30, 2008. For the three months ended September 30,
2009, the Company had a net realized gain of $148,000 and a net unrealized loss
of $1,470,000. For the three months ended September 30, 2008, the Company had
a net realized gain of $1,082,000 and net unrealized gain of $561,000. 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.
-21-
The Company may also invest, with the approval of the Securities Investment
Committee, in private investment equity funds and other unlisted securities,
such as convertible notes through private placements. Those investments in non-
marketable securities are carried at cost on the Company's balance sheet as
part of other investments, net of other than temporary impairment losses. As of
September 30, 2009, the Company had net other investments of $7,217,000. During
the three months ended September 30, 2009 and 2008, the Company performed an
impairment analysis of its other investments and determined that its
investments had other than temporary impairments and recorded impairment losses
of $0 and $595,000, respectively.
Margin interest and trading expenses increased to $376,000 for the three months
ended September 30, 2009 from $338,000 for the three months ended September 30,
2008 primarily as the result of the increase in margin interest expense related
to the increase in the use of margin.
The Company had an income tax benefit of $678,000($707,000 tax benefit from
continuing operations and $29,000 tax expense from discontinued operations) for
the three months ended September 30, 2009 compared to an income tax expense of
$310,000($269,000 tax expense from continuing operations and $41,000 tax
expense from discontinued operations) for the three months end September 30,
2008 primarily as the result of the Company having a pre-tax loss for the three
months ended September 30, 2009.
MARKETABLE SECURITIES AND OTHER INVESTMENTS
The Company's investment portfolio is diversified with 76 different equity
positions. The portfolio contains four individual equity securities that are
more than 5% of the equity value of the portfolio with the largest security
being 23.3% 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 September 30, 2009 and June 30, 2009, the Company had investments in
marketable equity securities of $15,755,000 and $13,920,000, respectively. The
following table shows the composition of the Company's marketable securities
portfolio by selected industry groups as of September 30, 2009 and June 30,
2009.
As of September 30, 2009
% of Total
Investment
Industry Group Fair Value Securities
-------------- ------------ ----------
Dairy products $ 3,669,000 23.3%
REITs 3,307,000 21.0%
Financial services 2,643,000 16.8%
Electronic traded funds(ETFs) 1,654,000 10.5%
Telecommunications and technology 1,316,000 8.4%
Other 3,166,000 20.0%
------------ ----------
$ 15,755,000 100.0%
============ ==========
-22-
As of June 30, 2009
% of Total
Investment
Industry Group Fair Value Securities
-------------- ------------ ----------
Dairy products $ 5,433,000 39.0%
REITs and financial 3,835,000 27.6%
Basic materials and energy 1,733,000 12.4%
Electronic traded funds(ETFs) 1,328,000 9.5%
Services 376,000 2.7%
Others 1,215,000 8.8%
---------- ----------
$ 13,920,000 100.0%
========== ==========
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 September 30, 2009 2008
-------------- --------------
Net (loss)gain on marketable securities $ (1,322,000) $ 1,643,000
Impairment loss on other investments - (595,000)
Dividend & interest income 77,000 60,000
Margin interest expense (136,000) (59,000)
Trading and management expenses (240,000) (279,000)
------------ ------------
$ (1,621,000) $ 770,000
============ ============
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from the operations of Justice
Investors. The Company also receives revenues generated from its real estate
operations and from the investment of its cash and securities assets. 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 the Company's real estate operations and from 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. For
the three months ended September 30, 2008, Justice paid a total of $850,000 in
limited partnership distributions, of which the Company received $425,000.
Following the payment of those distributions, the San Francisco hotel market
began to feel the full impact of the significant downturn in domestic and
international economies that continued throughout fiscal 2009. As a result, no
partnership distributions were paid for the three months ended September 30,
2009. Since no significant improvement in economic conditions is expected in
the lodging industry until sometime during the second half of calendar 2010, no
limited partnership distributions are anticipated in the foreseeable future.
The general partners will continue to monitor and review the operations and
financial results of the Hotel and to set the amount of any future
distributions that may be appropriate based on operating results, cash flows
and other factors, including establishment of reasonable reserves for debt
payments and operating contingencies.
The new Justice Compensation Agreement that became effective on December 1,
2008, when Portsmouth assumed the role of managing general partner of Justice,
has provided additional cash flows to the Company. Under the new Compensation
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Agreement, Portsmouth is now entitled to 80% of the minimum base fee to be paid
to the general partners of $285,000, while under the prior agreement,
Portsmouth was entitled to receive only 20% of the minimum base fee. As a
result, total general partner fees paid to Portsmouth for the three months
ended September 30, 2009 increased to $78,000, compared to $45,000 for the
three months ended September 30, 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 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 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. The principal balance
of the Prudential Loan was $28,157,000 as of September 30, 2009.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential
(the "Second Prudential Loan") in a 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 also without recourse to the limited and general partners of Justice.
The principal balance of the Second Prudential Loan was $18,412,000 as of
September 30, 2009.
Justice also has a $2,500,000 unsecured revolving line of credit facility from
United California Bank (which was acquired by East-West Bank as of November 6,
2009) that can be used for short term business requirements. The line of credit
matures on February 2, 2010 and borrowings bear interest at an annual interest
rate based on the Wall Street Journal Prime Rate plus 3%, floating, with an
interest rate floor of 5%. As of September 30, 2009, there was a balance of
$1,735,000 drawn by Justice under the line of credit facility, with an annual
interest rate of 6.25% (Prime at 3.25% as of September 30, 2009, plus 3%). The
Partnership was not incompliance with the financial covenants of its line of
credit as of June 30, 2009, but received a waiver of such non-compliance from
the bank on September 16, 2009.
Despite the downturns in the economy, the Hotel has continued to generate
positive cash flows. While the debt service requirements related to the two
Prudential loans, as well as the utilization of its 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 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.
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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 following table provides a summary of the Company's material financial
obligations as of September 30, 2009.
Total Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
------------ ---------- ---------- ---------- ----------- ---------- -----------
Mortgage notes payable $117,979,000 $1,623,000 $2,335,000 $5,561,000 $34,073,000 $3,338,000 $71,049,000
Line of credit 1,735,000 1,735,000 - - - - -
Other notes payable 483,000 304,000 179,000 - - - -
Capital leases 400,000 143,000 243,000 14,000 - - -
Operating leases 368,000 368,000 - - - - -
----------- --------- --------- --------- ---------- --------- ----------
Total $120,965,000 $4,173,000 $2,757,000 $5,757,000 $34,073,000 $3,338,000 $71,049,000
IMPACT OF INFLATION
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.
The Company's residential 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.
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 condensed 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
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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 4T. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and 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
quarterly period covered by this Quarterly Report on Form 10-Q. Based upon
such evaluation, the Chief Executive Officer and Principal 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 within the time periods
specified in the Securities and Exchange Commission rules and forms.
CHANGES IN 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-Q that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 6. Exhibits.
(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.
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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: November 13, 2009 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 13, 2009 by /s/ David Nguyen
------------------------------
David Nguyen, Treasurer
and Controller
(Principal Financial Officer)
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