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 September 30, 2006
[ ] 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 November 10, 2006 were 2,356,358 shares.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
INDEX
THE INTERGROUP CORPORATION
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet
As Of September 30, 2006 (unaudited) 3
Consolidated Statements of Operations (unaudited)
For the Three Months Ended September 30, 2006 and 2005 4
Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended September 30, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
-2-
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of September 30, 2006
-----------
ASSETS
Investment in hotel, at cost:
Land $ 1,124,000
Furniture and equipment 15,095,000
Building and improvements 42,204,000
Accumulated depreciation (15,827,000)
-----------
42,586,000
Investment in real estate, at cost:
Land 23,626,000
Buildings, improvements and equipment 61,318,000
Accumulated depreciation (20,275,000)
-----------
64,669,000
Property held for sale 14,021,000
-----------
78,690,000
Cash and cash equivalents 3,104,000
Restricted cash 2,852,000
Investment in marketable securities 19,787,000
Other investments 5,394,000
Prepaid expenses and other assets 13,234,000
-----------
Total assets $165,647,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to securities broker 8,965,000
Obligation for securities sold 2,671,000
Line of credit 4,258,000
Accounts payable and other liabilities 11,070,000
Mortgage note payable - hotel 45,617,000
Mortgage note payable - real estate 67,019,000
Mortgage note payable - property held for sale 11,289,000
Deferred income taxes 3,887,000
-----------
Total liabilities 154,776,000
-----------
Minority interest 2,729,000
-----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares
authorized; none issued -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,193,745 issued, 2,356,358 outstanding 21,000
Common stock, Class A $.01 par value, 2,500,000 shares
authorized; none issued -
Additional paid-in capital 8,686,000
Retained earnings 8,305,000
Treasury stock, at cost, 837,387 shares (8,870,000)
-----------
Total shareholders' equity 8,142,000
-----------
Total liabilities and shareholders' equity $165,647,000
===========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months ended September 30, 2006 2005
----------- -----------
Justice Investors operations:
Hotel and garage revenue $ 7,592,000 $ -
Operating expenses (6,360,000) -
Interest expense (749,000) -
Real estate taxes (180,000) -
Depreciation and amortization (1,034,000) -
----------- -----------
Loss from Justice Investors operations (731,000) -
----------- -----------
Real estate operations:
Rental income 3,173,000 3,028,000
Property operating expense (1,461,000) (1,430,000)
Mortgage interest expense (915,000) (944,000)
Real estate taxes (443,000) (439,000)
Depreciation (595,000) (620,000)
----------- -----------
Loss from real estate operations (241,000) (405,000)
----------- -----------
Equity in net loss of Justice Investors - (727,000)
----------- -----------
Investment transactions:
Net losses on marketable securities (880,000) (11,000)
Impairment loss on other investments - (58,000)
Dividend and interest income 58,000 302,000
Margin interest and trading expenses (480,000) (560,000)
----------- -----------
Loss from investment transactions (1,302,000) (327,000)
----------- -----------
Other income(expense):
General and administrative expense (394,000) (338,000)
Amortization of excess purchase price - Justice (60,000) (60,000)
Other income - 13,000
----------- -----------
Other expense (454,000) (385,000)
----------- -----------
Loss before provision for income taxes and
minority interest (2,728,000) (1,844,000)
Provision for income tax benefit 1,075,000 707,000
----------- -----------
Loss before minority interest (1,653,000) (1,137,000)
Minority interest benefit, net of tax 643,000 321,000
----------- -----------
Loss from continuing operations $ (1,010,000) $ (816,000)
----------- -----------
Discontinued operations:
Net loss on discontinued operations $ (58,000) $ (161,000)
Gain(loss) on sale of real estate - (24,000)
Provision for income tax benefit 23,000 71,000
----------- -----------
Loss from discontinued operations $ (35,000) $ (114,000)
----------- -----------
Net loss $ (1,045,000) $ (930,000)
=========== ===========
Loss per share from continuing operations
Basic $ (0.43) $ (0.34)
Diluted $ (0.43) $ (0.34)
=========== ===========
Loss per share from discontinued operations
Basic $ (0.01) $ (0.05)
Diluted $ (0.01) $ (0.05)
=========== ===========
Loss per share
Basic $ (0.44) $ (0.39)
Diluted $ (0.44) $ (0.39)
=========== ===========
Weighted average number of shares outstanding 2,357,146 2,403,192
=========== ===========
Diluted weighted average number of shares
outstanding 2,726,146 2,770,692
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
THE INTEGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months ended September 30, 2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $ (1,045,000) $ (930,000)
Adjustments to reconcile net loss to
cash provided by(used in) operating
activities:
Depreciation and amortization 1,628,000 620,000
Depreciation - discontinued operations - 68,000
Impairment loss on other investments - 58,000
Loss on sale of real estate - 24,000
Net unrealized loss(gains) on investments 1,352,000 (170,000)
Equity in net loss from Justice Investors - 787,000
Minority interest benefit (643,000) (321,000)
Changes in assets and liabilities:
Restricted cash (140,000) (2,000)
Investment in marketable securities 8,047,000 847,000
Prepaid expenses and other assets (2,675,000) (3,459,000)
Accounts payable and other liabilities 1,018,000 187,000
Due to broker (2,567,000) 3,479,000
Obligation for securities sold (3,964,000) (1,880,000)
----------- -----------
Net cash provided by(used in) operating activities 1,011,000 (692,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 325,000 -
Principal payments on mortgage notes payable (375,000) (2,377,000)
Payment on line of credit - (255,000)
Purchase of treasury stock (56,000) (375,000)
----------- -----------
Net cash used in financing activities (106,000) (3,007,000)
----------- -----------
Cash flows from investing activities:
Net proceeds from sale of real estate - 3,785,000
Additions to buildings, improvements
and equipment (718,000) (164,000)
Purchase of Santa Fe stock (18,000) -
----------- -----------
Net cash (used in)provided by investing activities (736,000) 3,621,000
----------- -----------
Net increase(decrease) in cash and cash
equivalents 169,000 (78,000)
Cash and cash equivalents at beginning of
period 2,935,000 868,000
----------- -----------
Cash and cash equivalents at end of period $ 3,104,000 $ 790,000
=========== ===========
Supplemental disclosure of non-cash activities:
Consolidation of Justice Investors
Gross components:
Assets(including cash of $2,352,000) $(42,975,000) $ -
Liabilities 52,366,000 -
Investment in Justice (7,321,000) -
Minority interest (2,343,000) -
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
THE INTERGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements included herein are unaudited; however,
in the opinion of The InterGroup Corporation ("InterGroup" or the "Company"),
the interim financial information contains all adjustments, including normal
recurring adjustments, necessary to present fairly the results for the interim
period. These consolidated financial statements include the accounts of the
Company and its subsidiaries and should be read in conjunction with the
Company's June 30, 2006 audited consolidated financial statements and notes
thereto.
As of September 30, 2006, the Company had the power to vote 78.1%, of the
voting shares of Santa Fe Financial Corporation ("Santa Fe"), a public company
(OTCBB: SFEF). Santa Fe's revenue is primarily generated through its 68.8%
owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), a public company
(OTCBB: PRSI). Portsmouth's operations primarily consist of owning and
managing a hotel property as a general partner and a 50% limited partner in
Justice Investors, a California limited partnership ("Justice" or the
"Partnership"). Santa Fe, Portsmouth and Justice are consolidated into the
Company's financial statements. See Note 4 regarding the consolidation of
Justice.
Certain prior quarter balances have been reclassified to conform with the
current quarter presentation.
The results of operations for the three months ended September 30, 2006 are not
necessarily indicative of results to be expected for the full fiscal year
ending June 30, 2007.
Property held for sale
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, 2006, the
Company had two properties classified as held for sale.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding. The
computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the weighted-average number of common
shares is increased to include the number of additional common shares that
would have been outstanding if potential dilutive common shares had been
issued. The Company's only potentially dilutive common shares are stock
options. Stock options are included in diluted earnings per share by
application of the treasury stock method. As of September 30, 2006, the
Company had 369,000 stock options that were considered potentially dilutive
common shares and 36,000 stock options that were considered anti-dilutive. As
of September 30, 2005, the Company had 367,500 stock options that were
considered potentially dilutive common shares and 37,500 stock options that
were considered anti-dilutive. These amounts were included in the calculation
for diluted earnings per share.
-6-
Stock-Based Compensation Plans
As of September 30, 2006, 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, 2006. On July 1, 2006, the Company implemented
Statement of Financial Accounting Standards 123(R), "Share-Based Payments"
("SFAS No. 123R") which replaced SFAS No. 123 and supercedes Opinion No. 25 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 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.
During the quarter ended September 30, 2006, there were no options granted,
exercised or vested. 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. During the fiscal year ended June 30,
2007, it is expected that 2,250 employee options will be 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, 2006 405,000 $9.91
Granted - -
Exercised - -
Forfeited - -
---------- ---------------
Unexercised options
Outstanding at September 30, 2006 405,000 $9.91
========== ===============
As of September 30, 2006, of the total 405,000 unexercised options outstanding,
$9,000 were not yet vested.
Unexercised Range of Weighted Average Weighted Average
Options Exercise Price Exercise Price Remaining Life
---------------- -------------- ---------------- ----------------
September 30, 2006 $7.92-$29.63 $ 9.91 3.20 years
Prior to the adoption to SFAS No 123R, the Company accounted for stock-based
awards using the intrinsic value method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Directors and Employees. The following table
illustrates the effect on the three months ended September 30, 2005 net income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148:
-7-
For the three months ended September 30, 2005
------------
Net loss $ (930,000)
Stock based employee
Compensation expense (44,000)
------------
Pro forma net loss $ (974,000)
============
Loss per share
Basic as reported $ (0.39)
Basic pro forma $ (0.41)
Diluted as reported $ (0.39)
Diluted pro forma $ (0.41)
2. Investment in Real Estate
As of September 30, 2006, the Company has listed for sale its 224-unit and its
30-unit apartment buildings located in Irving, Texas and Los Angeles,
California, respectively.
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 properties have been
reclassified from continuing operations for the three months ended September
30, 2006 and September 30, 2005 and reported as income from discontinued
operations in the consolidated statements of operations.
The revenues and expenses from the operation of the properties that were sold
or listed for sale during three months ended September 30, 2006 and September
30, 2005, are summarized as follows:
For the three months ended September 30 2006 2005
---------- ----------
Revenues $ 448,000 $ 454,000
Expenses (506,000) (615,000)
---------- ----------
Net loss (58,000) (161,000)
========== ==========
Depreciation expense for the three months ended September 30, 2006 and
September 30, 2005, was zero and $68,000, respectively.
3. Investment in Marketable Securities:
The Company's investment portfolio consists primarily of corporate equities.
The Company has also invested in corporate bonds and income producing
securities, which may include interests in real estate based companies and
REITs, where financial benefit could inure to its shareholders through income
and/or capital gain.
At September 30, 2006, 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:
-8-
As of September 30, 2006
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- -----------
Corporate
Equities $16,173,000 $4,905,000 ($1,291,000) $3,614,000 $19,787,000
As of September 30, 2006, the Company had $822,000 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 September 30, 2006, the Company
had obligations for securities sold (equities short) of $2,671,000.
Net gains on marketable securities on the statement of operations are comprised
of realized and unrealized gains. Below is the composition of the two
components for the three months ended September 30, 2006 and September 30,
2005, respectively.
For the three months ended September 30, 2006 2005
----------- -----------
Realized gains(losses) on marketable securities $ 472,000 $ (181,000)
Unrealized (losses)gains on marketable securities (1,352,000) 170,000
----------- -----------
Net losses on marketable securities (880,000) $ (11,000)
=========== ===========
4. Investment in Justice Investors:
Justice Investors owns the land, improvements and leaseholds now known as the
Hilton San Francisco Financial District, a 549-room hotel located at 750 Kearny
Street, San Francisco, California (the "Hotel").
The Company amortizes on a straight-line basis the step up in the asset values
which represents the excess purchase price over the underlying book value and
is allocable to the depreciable assets of its investment in Justice Investors
over 40 years, which approximates the remaining life of the primary asset, the
hotel building.
All significant partnership decisions require the active participation and
approval of both general partners. The Company and Evon jointly consult and
determine the amount of partnership reserves and the amount of cash to be
distributed to the limited partners. Pursuant to the terms of the partnership
agreement, voting rights of the partners are determined according to the
partners' entitlement to share in the net profit and loss of the partnership.
The Company is not entitled to any additional voting rights by virtue of its
position as a general partner. The partnership agreement also provides that no
portion of the partnership real property can be sold without the written
consent of the general and limited partners entitled to more than 72% of the
net profit.
On July 14, 2005, the Financial Accounting Standards Board directed Staff
Position (FSP) SOP 78-9-1, "Interaction of AICPA Statement of Position 78-9 and
EITF Issue No. 04-5" to amend the guidance in AICPA Statement of Position 78-9,
"Accounting for Investments in Real Estate Ventures" (SOP 78-9) to be
consistent with the consensus in Emerging Issues Task Force Issue No. 04-5
"Determining Whether a General Partner, or General Partners as a Group,
-9-
Controls a Limited Partnership or Similar Entity When the Limited Partners Have
Certain Rights" (Issue 04-5). FSP SOP 78-9-1 eliminated the concept of
"important rights" in paragraph .09 of SOP 78-9 and replaces it with the
concepts of "kick out rights" and "substantive participating rights" as defined
in Issue 04-5.
Under the amendment to paragraph .09 of SOP 78-9 the general partners of a
limited partnership should be deemed to control a limited partnership; however,
the rights of the limited partners may overcome that presumption of control.
The guidance in EITF Issue No. 04-5 should be used to determine whether the
rights of the limited partners overcome the presumption of control by the
general partners. The presumption of control is not overcome by the rights of
the limited partners and if a single general partner controls the limited
partnership, that general partner should consolidate the limited partnership
and apply the principles of accounting applicable for investments in
subsidiaries. For existing partnership agreements such as Justice Investors,
the guidance should be applied in financial statements issued for the first
reporting period in the fiscal years beginning after December 15, 2005.
During the fiscal quarter ended March 31, 2006, Portsmouth conducted an
assessment of its general and limited interest in Justice Investors under the
new guidance provided by SOP 78-9-1. The Company determined that, under the
limited partnership agreement, the limited partners of Justice do not have
either "kick out rights" to remove Portsmouth as a general partner or
"substantive participating rights" to direct the business of the Partnership.
Significant in that assessment is the fact that the limited partners of Justice
do not have the ability to dissolve (liquidate) the Partnership and effectively
remove the general partners without the participation and consent of
Portsmouth's 50.0% limited partnership interest since any action to sell the
Partnership real property and dissolve the Partnership requires the approval of
partners entitled to more than 72% of the net profit of the Partnership. Based
on its assessment, Portsmouth concluded that rights of the limited partners
under the Partnership agreement do not overcome the presumption that
Portsmouth, as a general partner and a significant limited partner, controls
the Partnership in accordance with guidance set forth in FSP SOP 78-9-1. Thus,
effective with the first reporting period of its fiscal year beginning July 1,
2006, Portsmouth has applied the principles of accounting applicable for
investments in subsidiaries due to its substantial limited partnership interest
and general partnership rights and has consolidated the financial statements of
Justice with those of the Company.
For the three months ended September 30, 2006, the results of operations for
Justice were consolidated with those of Portsmouth. However, for the three
months ended September 30, 2005, Portsmouth's investment in Justice was
accounted for under the equity method. For comparative purposes, the statement
of operations for Justice for the three months ended September 30, 2006 and
September 30, 2005 are disclosed below.
Significant to note is the operations of the Hotel were temporarily closed down
effective May 31, 2005, to complete the substantial renovations of the Hotel
required by the Hilton Franchise Agreement. Thus, the Hotel did not generate
any room or food and beverage revenues during the first quarter of fiscal 2005.
The below ground parking garage and Tru Spa located on the lobby level of the
Hotel, both of which are lessees of the Partnership, remained open during the
renovation work. As of January 12, 2006 the Hotel renovation work was
substantially completed, at which time Justice obtained approval from Hilton to
open the Hotel as the "Hilton San Francisco Financial District". The Hotel
opened with a limited number of rooms available to rent, which increased as the
Hotel transitioned into full operations by the end of February 2006.
-10-
JUSTICE INVESTORS
STATEMENTS OF OPERATIONS
For the three months ended September 30, 2006 2005
---------- ----------
Revenues:
Hotel rooms $ 5,881,000 $ -
Food and beverage 1,015,000 -
Rent - hotel garage 430,000 157,000
Other 266,000 121,000
Total revenues ---------- ----------
7,592,000 278,000
Operating expenses:
Hotel rooms (1,917,000) (6,000)
Food and beverage (1,300,000) (103,000)
Other operating expenses (2,334,000) (320,000)
Interest expense (749,000) (141,000)
Real estate taxes (180,000) (133,000)
Depreciation and amortization (1,034,000) (140,000)
General and administrative (822,000) (900,000)
---------- ----------
Total expenses (8,336,000) (1,743,000)
---------- ----------
(744,000) (1,465,000)
Intercompany eliminations 13,000 11,000
---------- ----------
Net loss $ (731,000) $(1,454,000)
========== ==========
During the three months ended September 30, 2006, Portsmouth received monthly
general partner management fees in the amount of $13,000 from Justice
Investors. This amount was eliminated from Justice operating expenses during
consolidation.
Below are the comparative standalone statements of operations for the Hotel for
the indicated periods.
For the three months ended September 30, 2006 2005
----------- ----------
Operating revenue:
Room $ 5,881,000 $ -
Food and beverage 1,015,000 -
Other operating revenue 178,000 -
----------- ----------
Total operating revenue 7,074,000 -
----------- ----------
Operating expenses:
Rooms (1,917,000) (6,000)
Food and beverage (1,300,000) (103,000)
Other operating expenses (3,214,000) (509,000)
----------- ----------
Total operating expenses (6,431,000) (618,000)
----------- ----------
Net income(loss) from Hotel operations 643,000 (618,000)
Net expenses at Justice Investors (1,374,000) (836,000)
----------- ----------
Net loss from Justice Investors $ (731,000) $(1,454,000)
=========== ==========
-11-
5. Related Parties
John V. Winfield serves as Chief Executive Officer and Chairman of the Company,
Portsmouth, and Santa Fe. Depending on certain market conditions and various
risk factors, the Chief Executive Officer, his family, Portsmouth and Santa Fe
may, at times, invest in the same companies in which the Company invests. The
Company encourages such investments because it places personal resources of the
Chief Executive Officer and his family members, and the resources of Portsmouth
and Santa Fe, at risk in connection with investment decisions made on behalf of
the Company.
6. Segment Information
The Company operates in three reportable segments, the operations of its multi-
family residential properties, the operation of Justice Investors, and the
investment of its cash and securities assets. These three operating segments,
as presented in the financial statements, reflect how management internally
reviews each segment's performance. Management also makes operational and
strategic decisions based on this information.
Information below represents reported segments for the three months ended
September 30, 2006 and September 30, 2005. Operating income for rental
properties consists of rental income. Operating income 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.
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
September 30, 2006 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 3,173,000 $ 7,592,000 $ (822,000) $ - $ 9,942,000 $ 448,000 $ 10,390,000
Operating expenses (1,461,000) (6,360,000) (480,000) - (8,301,000) (236,000) (8,537,000)
Real estate taxes (443,000) (180,000) - - (623,000) (61,000) (684,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 1,269,000 1,052,000 (1,302,000) - 1,018,000 151,000 1,169,000
Mortgage interest expense (915,000) (749,000) - - (1,664,000) (209,000) (1,873,000)
Depreciation and amort. (595,000) (1,034,000) - - (1,628,000) - (1,628,000)
General and administrative
Expense - - - (394,000) (394,000) - (394,000)
Amortization of purchase
price - Justice - (60,000) - (60,000) - (60,000)
Income tax benefit - - - 1,075,000 1,075,000 23,000 1,098,000
Minority interest - 373,000 - 270,000 643,000 - 643,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (241,000) (418,000) $(1,302,000) $ 951,000 $ (1,010,000) $ (35,000) $ (1,045,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $64,669,000 $42,586,000 $25,181,000 $19,190,000 $ 151,626,000 $ 14,021,000 $165,647,000
=========== =========== =========== =========== ============ ============ ============
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
September 30, 2005 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 3,028,000 $ (727,000) $ 291,000 $ - $ 2,592,000 $ 454,000 $ 3,046,000
Operating expenses (1,430,000) - (618,000) - (2,048,000) (348,000) (2,396,000)
Real estate taxes (439,000) - - - (439,000) (70,000) (509,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 1,119,000 (727,000) (327,000) - 105,000 36,000 141,000
Mortgage interest expense (944,000) - - - (944,000) (129,000) (1,073,000)
Depreciation (620,000) - - - (620,000) (68,000) (688,000)
Loss on sale of real estate - - - - - (24,000) (24,000)
General and administrative
Expense - - - (338,000) (338,000) - (338,000)
Amortization of purchase
price - Justice - (60,000) - - (60,000) - (60,000)
Other income - - - 13,000 13,000 - 13,000
Income tax benefit - - - 707,000 707,000 71,000 778,000
Minority interest benefit - - - 321,000 321,000 - 321,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (405,000) $ (787,000) $ (327,000) $ 703,000 $ (816,000) $ (114,000) $ (930,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $66,811,000 $ 8,778,000 $28,100,000 $ 6,288,000 $ 109,977,000 14,900,000 $124,877,000
=========== =========== =========== =========== ============ ============ ============
-12-
7. Subsequent event
On November 2, 2006, the Company entered into a lease of its commercial office
building located at 600 North Sepulveda, Blvd., Los Angeles, California. The
lease is for an initial term of five (5) years commencing on November 15, 2006
at a base rent of $14,250 per month.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The discussion below and elsewhere in the Report includes forward-looking
statements about the future business results and activities of the Company,
which, by their very nature, involve a number of risks and uncertainties. When
used in this discussion, the words "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, 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, including those discussed
below and in the Company's Form 10-KSB for the fiscal year ended June 30, 2006
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements. The Company undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's principal business is the ownership and operation of real estate.
Properties include nineteen apartment complexes, the Hotel operations of
Justice Investors (Justice" or the "Partnership"), two commercial real estate
properties, 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 with
exception of its Austin, Texas and Irving, Texas properties, are managed by
professional third party property management companies.
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.
The Company's subsidiary, Portsmouth, has a 50.0% interest in the Justice and
serves as one of the general partners. Justice owns the land, improvements and
leaseholds at 750 Kearny Street, San Francisco, California, now known as the
Hilton San Francisco Financial District hotel (the "Hotel"). The financial
statements of Justice have been consolidated with those of the Company,
effective as of July 1, 2006. See Note 4 to the Consolidated Financial
Statements.
-13-
The Hotel is operated by the Partnership, with the assistance of a Management
Agreement with Dow Hotel Company, LLC. ("Dow") to perform the day-to-day
management functions. 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. The Company also receives management fees as a
general partner of Justice for its services in overseeing and managing the
Partnership's assets.
On December 10, 2004, Justice entered into a Franchise License Agreement for
the right to operate the Hotel property as a Hilton brand hotel. Prior to
operating the hotel as a Hilton, the Partnership was required to make
substantial renovations to the hotel to meet Hilton standards in accordance
with a product improvement plan agreed upon by Hilton and the Partnership, as
well as complying with other brand standards. The term of the Agreement is for
a period of 15 years commencing on the opening date, with an option to extend
the license term for another five years, subject to certain conditions.
Effective May 31, 2005, the Partnership temporarily closed down its Hotel
operations to complete the renovations of the Hotel as required by the Hilton
Agreement. The below ground parking garage and Tru Spa located on the lobby
remained open during the renovation work, although the operations of both were
impacted during that period of time.
As of January 12, 2006 the Hotel renovation work was substantially completed,
at which time the Partnership obtained approval from Hilton to open the Hotel
as the "Hilton San Francisco Financial District". The Hotel opened with a
limited number of rooms available to rent, which increased as the Hotel
transitioned into full operations by the end of February 2006.
For the Three Months Ended September 30, 2006 Compared to the
Three Months Ended September 30, 2005
The Company had a net loss of $1,045,000 for the three months ended September
30, 2006 compared to a net loss of $930,000 for the three months ended
September 30, 2005. As discussed below, the change was primarily due the
significant increase in the net loss from marketable securities and the
reduction of dividend and interest income, partially offset by the smaller loss
related to the operations of Justice Investors and the smaller loss from its
real estate operations.
The net loss from the operations of Justice Investors decreased to $744,000 for
the three months ended September 30, 2006 from a net loss of $1,465,000(before
minority interest of $727,000) for the three months ended September 30, 2005.
That decrease was primarily attributable to net income generated from the
operations of the Hotel during the current quarter compared to the prior
quarter when the Hotel was temporarily closed for major renovations and from
higher garage rental income in the current quarter. Those results were
partially offset by higher interest costs, insurance costs, property taxes and
greater depreciation and amortization expenses resulting from the renovation of
the Hotel.
For the three months ended September 30, 2006, the Hotel operations generated
net income of $643,000 on total operating revenues of approximately $7,074,000,
while there were no revenues from the operations of the Hotel during the three
months ended September 30, 2005. Garage rent increased to $430,000 from
$157,000 primarily due to the Hotel being open during the current quarter. The
average daily room rate for the Hotel was approximately $151 and the average
occupancy rate was approximately 77% for the three months ended September 30,
2006.
-14-
Occupancy and average daily room rates have continued to improve since the
Hotel's reopening in January 2006 as the Hotel ramped up its operations and new
programs were implemented to increase revenues. However, the Hotel's food and
beverage operations remain problematic as they continue to generate losses,
primarily attributable to brand requirements of maintaining a three-meal, full
service restaurant, the associated costs of union labor, and the intense
competition in the San Francisco market for restaurants. Management will
continue to work closely with Dow and Hilton to address these issues and to
improve the operations of the Hotel.
The loss from real estate operations decreased to $241,000 for the three months
ended September 30, 2006 from $405,000 for the three months September 30, 2005
primarily as the result the increase in rental income to $3,173,000 from
$3,028,000. The increase in the rental income is as the result of the
improving rental housing market, thereby increasing the occupancy of the
Company's apartments. As of September 30, 2006, the Company has listed for
sale its 224-unit and its 30-unit apartment buildings located in Irving, Texas
and Los Angeles, California, respectively. The revenues and expenses related
to these properties are classified under discontinued operations.
The Company had net losses on marketable securities of $880,000 for the three
months ended September 30, 2006 compared to net losses on marketable securities
of $11,000 for the three months ended September 30, 2005. For the three months
ended September 30, 2006, the Company had net unrealized losses of $1,352,000
and net realized gains of $472,000. For the three months ended September 30,
2005, the Company had net unrealized gains of $170,000 and net realized losses
of $181,000. Gains and losses on marketable securities may fluctuate
significantly from period to period in the future and could have a significant
impact on the Company's net income. However, the amount of gain or loss on
marketable securities for any given period may have no predictive value and
variations in amount from period to period may have no analytical value. For a
more detailed description of the composition of the Company's marketable
securities please see the Marketable Securities section below.
Dividend and interest income decreased to $58,000 for the three months ended
September 30, 2006 from $302,000 for the three months ended September 30, 2005
as a result of the decreased investment in income yielding securities during
the quarter ended September 30, 2006.
Margin interest and trading expenses decreased to $480,000 from $560,000
primarily as the result of the reduction in trading related expenses while
margin interest expense remained consistent between the comparable quarters.
Corporate general and administrative expenses increased to $394,000 for the
three months ended September 30, 2006 from $338,000 for the three months ended
September 30, 2005 primarily as the result of the increase in audit related
fees.
The provision for income tax benefit increased to $1,075,000 for the three
months ended September 30, 2006 from $707,000 for the three months ended
September 30, 2005 as the result of the higher pre-tax loss incurred by the
Company during the current quarter.
Minority interest benefit increased to $643,000 from $321,000 primarily as the
result of the $373,000 minority interest benefit recognized during the quarter
ended September 30, 2006 related to the consolidation of Justice Investors.
This was the first quarter Portsmouth consolidated Justice Investors.
-15-
MARKETABLE SECURITIES
The Company's investment portfolio is diversified with 54 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 6.7% 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, 2006, the Company had investments in marketable equity
securities of $19,787,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
September 30, 2006.
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
REITs and building materials $ 4,057,000 20.5%
Retail and consumer goods 2,400,000 12.1%
Telecommunications and media 2,307,000 11.7%
Technology and internet 2,066,000 10.4%
Dairy products 1,750,000 8.8%
Services 1,623,000 8.2%
Insurance, banks and brokers 1,372,000 6.9%
Newspapers and paper mills 1,103,000 5.6%
Pharmaceuticals and healthcare 852,000 4.3%
Other 2,257,000 11.5%
------------ ----------
$19,787,000 100.0%
============ ==========
The following table shows the investment 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, 2006 2005
-------------- --------------
Net losses on marketable securities $ (880,000) $ (11,000)
Impairment loss on other investments - (58,000)
Dividend & interest income 58,000 302,000
Margin interest expense (174,000) (173,000)
Trading and management expenses (306,000) (387,000)
------------ ------------
$ (1,302,000) $ (327,000)
============ ============
-16-
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are generated primarily from the Hotel operations of
Justice, its real estate activities, sales of investment securities and
borrowings related to both. During the three months ended September 30, 2006,
operating activities provided cash of $1,011,000, financing activities used
cash of $106,000 and investing activities used cash of $736,000.
During the three months ended September 30, 2006, the Company made property
improvements in the aggregate amount of $718,000. 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.
Prior to operating the Hotel as a Hilton, Justice was required to make
substantial renovations to the hotel to meet Hilton standards in accordance
with a product improvement plan agreed upon by Hilton and the Partnership, as
well as complying with other brand standards. The total cost of the
construction-renovation project of the Hotel was approximately $36.4 million,
which excludes approximately $630,000 in interest costs incurred during for the
construction phase that were capitalized.
To meet its substantial financial commitments for the renovation project 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
(the "Prudential Loan") with The Prudential Insurance Company of America in a
principal amount of $30,000,000. The term of the Loan is for 120 months at a
fixed interest rate of 5.22% per annum. The Loan calls for monthly installments
of principal and interest in the amount of approximately $165,000, calculated
on a 360 month amortization schedule. The Loan is collateralized by a first
deed of trust on the Partnership's Hotel property, including all improvements
and personal property thereon and an assignment of all present and future
leases and rents. The Loan is without recourse to the limited and general
partners of Justice.
On July 27, 2005, Justice also obtained a $10,000,000 Revolving Line of Credit
("LOC") from United Commercial Bank ("UCB"). The term of the LOC is for 60
months at an annual interest rate, based on an index selected by Justice at the
time of the advance, equal to the Wall Street Journal Prime Rate or the Libor
Rate plus 2%, fixed for the period selected by the Partnership. The LOC is
collateralized by a second deed of trust on the Hotel property. Interest only
is payable monthly with principal and accrued interest due a maturity. On
January 20, 2006, the Partnership obtained a $4,500,000 increase in its LOC,
raising the total amount available to the Partnership pursuant to $14,500,000.
The increase in the credit line is on the same terms as the existing line of
credit with additional loan and documentation fees of $4,000. On May 23, 2006,
Justice obtained a short term increase of its LOC of an additional $2,000,000,
raising the total amount available to the Partnership to $16,500,000. If the
short term increase of is not paid off by December 31, 2006, UCB has the right
to record a lien on the Hotel property for the additional $2,000,000. That
increase is also on the same terms as the existing LOC, with additional
documentation fees of $1,000. As of September 30, 2006, approximately
$16,079,000 of the LOC was utilized.
The Prudential Loan and the LOC have provided Justice with sufficient financial
resources for the Partnership to complete the substantial renovations to the
Hotel required by its Franchise License Agreement with Hilton and to meet its
debt service requirements and operating capital needs through the reopening of
the Hotel and the period of time necessary to ramp up operations. The Hotel
-17-
started to generate net operating income from its operations in June 2006,
which have continued to improve in the first quarter of the Company's current
fiscal year. Management believes that the revenues expected to be generated
from the Hotel operations and the garage lease will be sufficient to meet all
of its 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.
The additional amount of leverage related to the Prudential Loan and the
utilization of the LOC and the associated debt service will create additional
risk for the Company and its ability to generate cash flows in the future since
the Hotel asset has been virtually debt free for many years. Justice also does
not anticipate paying any partnership distributions until net income from the
operations of the Hotel and capital requirements warrant such distributions.
As a result, the Company may have to continue to rely on revenues generated
from its real estate operations and the investment of its cash and securities
assets during that transition period.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's marketable
securities are classified as trading with unrealized gains and losses recorded
through the statement of operations.
Management believes that the net cash flow generated from future operating
activities and its capital resources will be adequate to meet its current and
future obligations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The Company also does not have any material contractual obligations or
commercial commitments other than the mortgages of its rental properties and
Justice Investors' first mortgage loan with Prudential and its LOC with United
Commercial Bank.
IMPACT OF INFLATION
The Company's residential and commercial rental properties provide income from
short-term operating leases and no lease extends beyond one year. Rental
increases are expected to offset anticipated increased property operating
expenses.
Hotel room rates are typically impacted by supply and demand factors, not
inflation, since rental of a hotel room is usually for a limited number of
nights. Room rates can be, and usually are, adjusted to account for
inflationary cost increases. To the extent that Dow is able to adjust room
rates, there should be minimal impact on partnership revenues due to inflation.
Partnership revenues are also subject to interest rate risks, which may be
influenced by inflation. For the two most recent fiscal years, the impact of
inflation on the Company's income is not viewed by management as material.
-18-
CRITICAL ACCOUNTING POLICIES
The Company reviews its long-lived assets and other investments for impairment
when circumstances indicate that a potential loss in carrying value may have
occurred. To the extent that projected future undiscounted cash flows from the
operation of the Company's hotel property, owned through the Company's
investment in Justice Investors, and rental properties are less than the
carrying value of the asset, the carrying value of the asset is reduced to its
fair value. For other investments, the Company reviews the investment's
operating results, financial position and other relevant factors to determine
whether the estimated fair value of the asset is less than the carrying value
of the asset.
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading with net unrealized gains or losses
included in earnings.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company's Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Quarterly Report on Form 10-QSB. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed in this filing is accumulated and communicated to management and is
recorded, processed, summarized and reported in a timely manner and in
accordance with Securities and Exchange Commission rules and regulations.
(b) Internal Control Over Financial Reporting.
There have been no changes in the Company's internal control over financial
reporting during the last quarterly period covered by this Quarterly Report on
Form 10-QSB that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
-19-
PART II.
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
(c) Purchases of equity securities by the small business issuer and affiliated
purchasers.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(c)Total Number (d)Maximum Number
(a)Total (b) of Shares Purchased of Shares that May
Fiscal Number of Average as Part of Publicly Yet Be Purchased
2007 Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
--------------------------------------------------------------------------------------
Month #1
(Jul. 1- 3,302 $15.80 3,302 32,815
Jul. 31)
--------------------------------------------------------------------------------------
Month #2
(Aug. 1- - - - 32,815
Aug. 31)
--------------------------------------------------------------------------------------
Month #3
(Sep. 1- 202 $17.51 202 32,613
Sep. 30)
--------------------------------------------------------------------------------------
Total 3,504 $15.90 3,504 32,613
--------------------------------------------------------------------------------------
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.
-20-
Item 5. Other Information.
On October 2, 2006, InterGroup received a Nasdaq Staff Deficiency Letter
indicating that the Company fails to comply with the minimum $10,000,000
Stockholders' Equity requirement for continued listing of its common stock on
The Nasdaq Global Market set forth in Marketplace Rule 4450(a)(3). The Company
had until October 17, 2006 to submit a specific plan to achieve and sustain
compliance with all NASDAQ Global Market listing requirements.
On October 17, 2006, the Company submitted an application to The NASDAQ Stock
Market for the transfer of the listing of its common stock from the Global
Market tier to the Capital Market tier of The NASDAQ Stock Market. The
Company's application was approved by The NASDAQ Stock Market and the Company's
common stock commenced trading on the Capital Market tier on November 8, 2006.
The Company's trading symbol of "INTG" remains the same. The Company's common
stock is also listed on NYSE Arca (formerly the Pacific Exchange).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K:
-------------------
The Company did not file any reports on Form 8-K during the last quarter of the
period covered by this Report.
-21-
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 14, 2006 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2006 by /s/ David T. Nguyen
------------------------------
David T. Nguyen, Treasurer
and Controller
(Principal Accounting Officer)
-22-