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, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission File Number: 1-10324
THE INTERGROUP CORPORATION
--------------------------
(Exact name of registrant 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
-----------------------------
(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
As of September 30, 2008(Unaudited) and June 30, 2008(Audited) 3
Condensed Consolidated Statements of Operations(Unaudited)
For the Three Months ended September 30, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows(Unaudited)
For the Three Months ended September 30, 2008 and 2007 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 4T. Controls and Procedures 23
Part II. OTHER INFORMATION
Item 6. Exhibits 24
SIGNATURES 24
-2-
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2008 June 30, 2008
(Unaudited) (Audited)
------------ -----------
ASSETS
Investment in hotel, net $ 47,446,000 $ 48,122,000
Investment in real estate, net 64,911,000 65,296,000
Properties held for sale 7,066,000 7,064,000
Investment in marketable securities 4,969,000 6,706,000
Other investments, net 6,556,000 6,798,000
Cash and cash equivalents 1,127,000 1,906,000
Restricted cash 1,711,000 1,653,000
Other assets, net 4,012,000 3,796,000
Minority interest of Justice Investors 7,122,000 6,793,000
----------- -----------
Total assets $144,920,000 $148,134,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 10,718,000 $ 10,462,000
Due to securities broker 1,747,000 2,633,000
Lines of credit 1,500,000 4,975,000
Mortgage notes payable - hotel 47,305,000 47,482,000
Mortgage notes payable - real estate 61,693,000 61,433,000
Mortgage notes payable - property held for sale 10,262,000 10,313,000
Deferred income taxes 2,396,000 2,086,000
----------- -----------
Total liabilities 135,621,000 139,384,000
----------- -----------
Minority interest 3,449,000 3,621,000
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized; none issued -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,204,653 issued, 2,351,273 outstanding 32,000 32,000
Additional paid-in capital 8,863,000 8,791,000
Retained earnings 6,106,000 5,457,000
Treasury stock, at cost, 853,380 shares (9,151,000) (9,151,000)
----------- -----------
Total shareholders' equity 5,850,000 5,129,000
----------- -----------
Total liabilities and shareholders' equity $144,920,000 $148,134,000
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended September 30, 2008 2007
----------- -----------
Hotel operations:
Hotel and garage revenue $ 9,299,000 $ 9,786,000
Operating expenses (7,065,000) (8,317,000)
Real estate taxes (177,000) (177,000)
Interest expense (719,000) (702,000)
Depreciation and amortization (1,147,000) (1,148,000)
----------- -----------
Income(loss) from hotel operations 191,000 (558,000)
----------- -----------
Real estate operations:
Rental income 3,226,000 2,999,000
Property operating expense (1,273,000) (1,092,000)
Real estate taxes (366,000) (385,000)
Mortgage interest expense (860,000) (942,000)
Depreciation (549,000) (550,000)
----------- -----------
Income from real estate operations 178,000 30,000
----------- -----------
Investment transactions:
Net gain(loss) on marketable securities 1,643,000 (1,377,000)
Impairment loss on other investments (595,000) (125,000)
Dividend and interest income 60,000 53,000
Margin interest and trading expenses (338,000) (432,000)
----------- -----------
Income(loss) from investment transactions 770,000 (1,881,000)
----------- -----------
General and administrative expense (381,000) (429,000)
----------- -----------
Income(loss) before income tax and minority interest 758,000 (2,838,000)
Minority interest - Justice Investors, pre-tax (96,000) 278,000
----------- -----------
Loss before income tax 662,000 (2,560,000)
Income tax (expense)benefit (275,000) 1,078,000
----------- -----------
Income(loss) before minority interest 387,000 (1,482,000)
Minority interest, net of tax 212,000 409,000
----------- -----------
Income(loss) from continuing operations 599,000 (1,073,000)
----------- -----------
Discontinued operations:
Income(loss) from discontinued operations 85,000 (39,000)
Gain on sale of real estate - 4,074,000
Provision for income tax expense (35,000) (1,699,000)
----------- -----------
Income from discontinued operations 50,000 2,336,000
----------- -----------
Net income $ 649,000 $ 1,263,000
=========== ===========
Net income(loss) per share from continuing operations
Basic $ 0.26 $ (0.46)
=========== ===========
Diluted $ 0.22 $ (0.46)
=========== ===========
Net income per share from discontinued operations
Basic $ 0.02 $ 0.99
=========== ===========
Diluted $ 0.02 $ 0.99
=========== ===========
Net loss per share
Basic $ 0.28 $ 0.54
=========== ===========
Diluted $ 0.24 $ 0.54
=========== ===========
Weighted average shares outstanding 2,347,853 2,352,335
=========== ===========
Diluted weighted average shares outstanding 2,721,353 2,352,335
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
THE INTEGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended September 30, 2008 2007
----------- -----------
Cash flows from operating activities:
Net income $ 649,000 $ 1,263,000
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,696,000 1,698,000
Impairment loss on other investments 595,000 125,000
Gain on sale of real estate - (4,074,000)
Net unrealized (gain)loss on investments (561,000) 1,130,000
Minority interest benefit (116,000) (687,000)
Stock compensation expense 72,000 72,000
Changes in assets and liabilities:
Investment in marketable securities 2,298,000 7,505,000
Other investments (353,000) (125,000)
Other asset (176,000) (64,000)
Accounts payable and other liabilities 256,000 652,000
Due to securities broker (886,000) (5,637,000)
Obligation for securities sold - (1,286,000)
Deferred tax liability 310,000 621,000
----------- -----------
Net cash provided by operating activities 3,784,000 1,193,000
----------- -----------
Cash flows from investing activities:
Net proceeds from sale of real estate - 7,739,000
Investment in hotel (471,000) (1,348,000)
Investment in real estate (166,000) (665,000)
Restricted cash (58,000) 754,000
----------- -----------
Net cash (used in)provided by investing activities (695,000) 6,480,000
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 500,000 6,850,000
Principal payments on mortgage notes payable (468,000) (12,419,000)
Paydown of line of credit (3,475,000) (3,000,000)
Distributions to minority partner (425,000) -
----------- -----------
Net cash used in financing activities (3,868,000) (8,569,000)
----------- -----------
Net decrease in cash and cash equivalents (779,000) (896,000)
Cash and cash equivalents at beginning of
period 1,906,000 2,158,000
----------- -----------
Cash and cash equivalents at end of period $ 1,127,000 $ 1,262,000
=========== ===========
Supplemental information:
Interest paid $ 1,863,000 $ 1,914,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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, 2008, the Company had the power to vote 79.9% 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 limited partnership ("Justice" or the "Partnership") and
serves as one of the two general partners. The other general partner, Evon
Corporation ("Evon"), serves as the managing general partner. 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, known as the "Hilton San Francisco Financial District"
(the "Hotel") and related facilities, including a five level parking garage.
The Hotel was temporarily closed for major renovations from May 2005 to January
2006. The total construction costs related to the renovation project was
approximately $37 million.
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. The Partnership
also derives income from the lease of the parking garage to Evon and a lease of
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. Most of the Company's residential rental properties,
are managed by professional third party property management companies.
-6-
Certain prior period balances have been reclassified to conform with the
current period presentation.
The results of operations for the three months ended September 30, 2008 are not
necessarily indicative of results to be expected for the full fiscal year
ending June 30, 2009.
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 162(SFAS No. 162), The Hierarchy of
Generally Accepted Accounting Principles. This new standard is intended to
improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with GAAP for
nongovernmental entities. SFAS No. 162 is effective on November 15, 2008. The
Company does not believe SFAS No. 162 will have a significant impact on its
financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, and amendment to Accounting Research
Bulletin (ARB) No. 51," (SFAS No. 160). This standard prescribes the accounting
by a parent company for minority interests held by other parties in a
subsidiary of the parent company. SFAS No. 160 is effective for the Company for
fiscal year ending June 30, 2010. The Company is currently assessing the impact
of SFAS No. 160 on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces SFAS No. 141. SFAS 141R establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity's fiscal
year that begins after December 15, 2008. The provisions of SFAS 141R are
effective for the Company for the fiscal year ending June 30, 2010. The
Company is currently assessing the impact of SFAS 141R on its 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, 2008, the
Company had two 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 Statement of Financial Accounting Standards No.144,
Accounting for Impairment or Disposal of Long-Lived Assets, 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, 2008 and 2007 and reported as income from discontinued operations
in the consolidated statements of operations.
-7-
Minority Interest
Minority interests in the net assets and earnings or losses of consolidated
subsidiaries are reflected in the caption "Minority interest" in the Company's
condensed consolidated balance sheet and condensed consolidated statements of
operations. Minority interest adjusts the Company's consolidated results of
operations to reflect only the Company's share of the earnings or losses of the
consolidated subsidiaries. As of September 30, 2008 and June 30, 2008, the
Company reported the minority interest of Justice Investors as an asset in the
condensed consolidated balance sheet as the result of the accumulated deficit
at Justice Investors. Management believes the accumulated deficit is
considered temporary as the Hotel was temporarily closed to undergo major
renovations from May 2005 to January 2006. The Company expects the Hotel to be
profitable, thereby reversing the accumulated deficit in the future. The
minority interest in other subsidiaries is reported under the liability section
in the condensed consolidated balance sheet as of September 30, 2008 and June
30, 2008.
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. As of September 30, 2008, the Company had 373,500 stock options that
were considered potentially dilutive common shares and 16,500 stock options
that were considered anti-dilutive. As of September 30, 2007, the Company had
371,250 stock options that were considered potentially dilutive common shares
and 18,750 stock options that were considered anti-dilutive.
NOTE 2 - INVESTMENT IN HOTEL, NET
Hotel property and equipment consisted of the following:
Accumulated Net Book
As of September 30, 2008 Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 16,461,000 (8,805,000) 7,656,000
Building and improvements 53,747,000 (16,695,000) 37,052,000
------------ ------------ ------------
$ 72,946,000 $(25,500,000) $ 47,446,000
============ ============ ============
Accumulated Net Book
As of June 30, 2008 Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 16,279,000 (8,005,000) 8,274,000
Building and improvements 53,486,000 (16,376,000) 37,110,000
------------ ------------ ------------
$ 72,503,000 $(24,381,000) $ 48,122,000
============ ============ ============
-8-
NOTE 3 - INVESTMENT IN REAL ESTATE
Investment in real estate included the following:
September 30, 2008 June 30, 2008
---------- ---------
Land $ 24,735,000 $ 24,735,000
Buildings, improvements and equipment 60,944,000 60,778,000
Accumulated depreciation (20,768,000) (20,217,000)
---------- ----------
$ 64,911,000 $ 65,296,000
========== ==========
In July 2008, the Company modified the mortgage on its 264-unit apartment
complex located in St. Louis, Missouri and borrowed an additional $500,000
bringing the outstanding of the note as of September 30, 2008 to $6,176,000.
The term and the interest rate on the note remain the same.
NOTE 4 - PROPERTY HELD FOR SALE AND DISCONTINUED OPERATIONS
During the three months ended September 30, 2008, the Company had listed for
sale its 249-unit apartment building located in Austin, Texas and its 132-unit
apartment located in San Antonio, Texas (both classified as Held for Sale on
the balance sheet). Under the provisions of the Statement of Financial
Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-
Lived Assets, for properties disposed of or listed for sale during the year,
the revenues and expenses are accounted for under discontinued operations in
the statement of operations. The revenues and expenses from the operation of
these two properties have been reclassified from continuing operations for the
three months ended September 30, 2008 and 2007 and are reported as income(loss)
from discontinued operations in the consolidated statements of operations.
The revenues and expenses from the operation of these three properties during
the three months ended September 30, 2008 and 2007, are summarized as follows:
For the three months ended September 30, 2008 2007
---------- ----------
Revenues $ 657,000 $ 830,000
Expenses (572,000) (869,000)
---------- ----------
Income(loss) $ 85,000 $ (39,000)
========== ==========
In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate
of $4,074,000. The Company received net proceeds after selling costs of
$7,739,000 and paid off the related outstanding mortgage note payable of
$4,007,000.
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.
-9-
At September 30, 2008, all of the Company's marketable securities are
classified as trading securities. In accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the change in the
unrealized gains and losses on these investments are included earnings.
Trading securities are summarized as follows:
Gross Gross Net Fair
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- -----------
As of September 30, 2008
Corporate
Equities $ 3,571,000 $2,459,000 ($1,061,000) $1,398,000 $4,969,000
As of June 30, 2008
Corporate
Equities $ 5,869,000 $ 2,127,000 ($1,290,000) $ 837,000 $6,706,000
As of September 30, 2008 and June 30, 2008, the Company had unrealized losses
of $748,000 and $708,000, 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, 2008 and 2007,
respectively.
For the three months ended September 30, 2008 2007
----------- -----------
Realized gains on marketable securities $ 1,082,000 $ (247,000)
Unrealized (losses)gains on marketable securities 561,000 (1,130,000)
----------- -----------
Net (loss)gain on marketable securities $ 1,643,000 $(1,377,000)
=========== ===========
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, 2008 and June 30, 2008, the Company had net other
investments of $6,556,000 and $6,798,000, respectively, which consist of the
following:
Type September 30, 2008 June 30, 2008
--------------------------- ----------------- ----------------
Private equity hedge fund $ 6,256,000 $ 6,434,000
Corporate debt instruments - 64,000
Other 300,000 300,000
----------------- ----------------
$ 6,556,000 $ 6,798,000
================= ================
In accordance with Emerging Issues Task Force No. 03-01, "The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments", the
Company recorded impairment losses $595,000 and $125,000, respectively, during
the three months ended September 30, 2008 and 2007.
-10-
In June 2008, the Company entered into an agreement to make additional
investments in corporate debt instruments in the aggregate amount of
$1,250,000. In addition, the Company's chairman agreed to invest in a like
amount and on the same terms as the Companies. As of September 30, 2008, a
total of $1,000,000 of the investment has been made by the Company. In October
2008, the remaining investment of $250,000 was made.
NOTE 7 - FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 is effective as of the beginning of the Company's 2009 fiscal
year. In February 2008, the FASB deferred the effective date of SFAS No. 157
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 SFAS No. 157 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. The impact on the financial
statements from adoption of SFAS No. 157 as it pertains to non-financial assets
and liabilities has not yet been determined.
SFAS No. 157 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
The assets measured at fair value on a recurring basis as of September 30, 2008
are as follows:
Assets: Level 1 Level 2 Level 3 September 30, 2008
----------- --------- --------- --------- ------------------
Cash $1,127,000 - - $1,127,000
Restricted cash 1,711,000 - - 1,711,000
Investment in marketable securities 4,969,000 - - 4,969,000
--------- --------- --------- ---------
$7,807,000 - - $7,807,000
========= ========= ========= =========
The fair values of investments in marketable securities are determined by the
most recently traded price of each security at the balance sheet date.
-11-
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 an 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, 2008:
Loss for the
Three months ended
Assets: Level 1 Level 2 Level 3 September 30, 2008 September 30, 2008
----------- --------- --------- --------- ------------------ ------------------
Other non-marketable investments - - $6,556,000 $6,556,000 $(595,000)
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.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115." SFAS No. 159 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
SFAS No. 159 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.
NOTE 8 - LINES OF CREDIT
In April 2004, the Company obtained a revolving $5,000,000 line of credit
("LOC"). The LOC carries a variable interest rate(lender's base rate plus 1%).
Interest is paid on a monthly basis. During the three months ended September
30, 2008, the outstanding balance on the line of credit of $3,462,000 was paid
off. The LOC has matured as of September 30, 2008.
The Partnership has available a line of credit with a bank for $3,000,000 that
expires on February 2, 2009. As of September 30, 2008, there was a balance of
$1,500,000 drawn by Justice under the line of credit, with an annual interest
rate at Prime less 0.5% (4.00% as of September 30, 2008).
NOTE 9 - STOCK BASED COMPENSATION PLANS
As of September 30, 2008, the Company currently has two stock compensation
plans, which are more fully described in Note 17 of the Company's Form 10-KSB.
The Company follows the Statement of Financial Accounting Standards 123
(Revised), "Share-Based Payments" ("SFAS No. 123R") which addresses accounting
-12-
for equity-based compensation arrangements, including employee stock options.
Under SFAS No. 123R, 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 three months ended September 30, 2008, there were no options granted
or exercised. Accordingly, no stock-based compensation expense was recognized
during the period. Since inception of the two stock options plans, there have
been no options exercised.
The following table summarizes the stock options outstanding as of September
30, 2008:
Number of Weighted-average
Shares Exercise Price
---------- ---------------
Outstanding at June 30, 2007 405,000 $9.91
Granted - -
Exercised - -
Forfeited (15,000) $35.11
---------- ---------------
Outstanding at June 30, 2008 390,000 $9.13
Granted - -
Exercised - -
Forfeited - -
---------- ---------------
Outstanding at September 30, 2008 390,000 $9.13
========== ===============
Exercisable at September 30, 2008 385,500 $9.13
========== ===============
The range of exercise prices for the outstanding and exercisable options as of
September 30, 2008 are as follows:
Number of Range of Weighted Average Weighted Average
Options Exercise Price Exercise Price Remaining Life
--------- -------------- ---------------- ----------------
Outstanding options 390,000 $7.92-$18.00 $ 9.13 1.25 years
Exercisable options 385,000 $7.92-$12.70 $ 8.79 1.07 years
NOTE 10 - SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel,
the operation of its multi-family residential properties and the investment of
its cash in marketable securities and other investments. These three operating
segments, as presented in the financial statements, reflect how management
internally reviews each segment's performance. Management also makes
operational and strategic decisions based on this information.
Information below represents reported segments for the three months ended
September 30, 2008 and 2007. Operating income(loss) from hotel operations
consist of the operations of the hotel and 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.
-13-
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 $ 3,226,000 $ 1,703,000 $ - $ 14,228,000 $ 657,000 $ 14,885,000
Operating expenses (9,108,000) (3,048,000) (933,000) - (13,089,000) (572,000) (13,661,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income 191,000 178,000 770,000 - 1,139,000 85,000 1,224,000
General and administrative
Expense - - - (381,000) (381,000) - (381,000)
Income tax expense - - - (275,000) (275,000) (35,000) (310,000)
Minority interest (96,000) - - 212,000 116,000 - 116,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ 95,000 178,000 $ 770,000 $ (444,000) $ 599,000 $ 50,000 $ 649,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $41,740,000 $64,911,000 $11,525,000 $19,678,000 $ 137,854,000 $ 7,066,000 $144,920,000
=========== =========== =========== =========== ============ ============ ============
As of and for the
Three months ended Hotel Real Estate Investment Discontinued
September 30, 2007 Operations Operations Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income $ 9,786,000 $ 2,999,000 $(1,449,000) $ - $ 11,336,000 $ 830,000 $ 12,166,000
Operating expenses (10,344,000) (2,969,000) (432,000) - (13,745,000) (869,000) (14,614,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) (558,000) 30,000 (1,881,000) - (2,409,000) (39,000) (2,448,000)
Gain on sale of real estate - - - - - 4,074,000 4,074,000
General and administrative
Expense - - - (429,000) (429,000) - (429,000)
Income tax benefit - - - 1,078,000 1,078,000) (1,699,000) (621,000)
Minority interest 278,000 - - 409,000 687,000 - 687,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (280,000) 30,000 $(1,881,000) $ 1,058,000 $ (1,073,000) $ 2,336,000 $ 1,263,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $51,625,000 $66,571,000 $14,422,000 $11,781,000 $ 144,399,000 $ 6,938,000 $151,337,000
=========== =========== =========== =========== ============ ============ ============
NOTE 11 - RELATED PARTIES
John V. Winfield serves as Chief Executive Officer and Chairman of the Company,
Portsmouth, and Santa Fe. Depending on certain market conditions and various
risk factors, the Chief Executive Officer, his family, Portsmouth and Santa Fe
may, at times, invest in the same companies in which the Company invests. The
Company encourages such investments because it places personal resources of the
Chief Executive Officer and his family members, and the resources of Portsmouth
and Santa Fe, at risk in connection with investment decisions made on behalf of
the Company.
The garage lessee, Evon, is the Partnership's managing general partner. Under
the terms of the lease agreement, Evon paid the Partnership $399,000 and
$415,000 for the three months ended September 30, 2008 and 2007, respectively.
-14-
NOTE 12 - SUBSEQUENT EVENT
In October 2008, the Company refinanced its $2,800,000 mortgage note payable on
its 132-unit apartment complex located in San Antonio, Texas (a held for sale
property) and obtained a new $2,850,000 mortgage note payable. The new note
matures on October 31, 2011 and has a fixed interest rate of 5.26% with no
early prepayment penalty.
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 and travel, 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,
partnership distributions, the ability to obtain financing at favorable
interest rates and terms, securities markets, regulatory factors, litigation
and other factors discussed below in this Report and in the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2008, that could cause
actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as to the date hereof. The Company undertakes no obligation
to publicly release the results of any revisions to those forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's principal business is conducted through Portsmouth's general and
limited partnership interest in Justice, rental income from its investments in
multi-family real estate properties and income received from investment of its
cash and securities assets. Portsmouth has a 50.0% ownership interest in
Justice and serves as one of the general partners. Justice owns the land,
improvements and leaseholds at 750 Kearny Street, San Francisco, California,
known as the Hilton San Francisco Financial District hotel (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.
-15-
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. Those fees
are eliminated in consolidation.
In addition to the operations of the Hotel, the Company also generates income
from the ownership and management of real estate. Properties include eighteen
apartment complexes, 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 the San Antonio and Las
Colinas, 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.
Three Months Ended September 30, 2008 Compared to the Three Months Ended
September 30, 2007
The Company had net income of $649,000 for the three months ended September 30,
2008 compared to net income $1,263,000 for the three months ended September 30,
2007. During most recent quarter, the Company had significant improvements in
all three of its operations. The Company had income from investment
transactions of $770,000 compared to a loss of $1,881,000, income from hotel
operations of $191,000 compared to a loss of $558,000 and income from real
estate operations of $178,000 compared to income of $30,000. During the
comparable quarter ended September 30, 2007, the Company sold a real estate
property and recognized a gain on its sale of $4,074,000, which primarily
resulted in the Company having net income of $1,263,000.
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended September 30, 2008 and 2007.
For the three months ended September 30, 2008 2007
---------- ----------
Hotel revenues:
Hotel rooms $ 7,588,000 $ 7,915,000
Food and beverage 1,259,000 1,289,000
Garage 399,000 415,000
Other operating departments 53,000 167,000
---------- ----------
Total hotel revenues 9,299,000 9,786,000
---------- ----------
Operating expenses excluding interest, depreciation
and amortization (7,242,000) (8,512,000)
---------- ----------
Operating income 2,057,000 1,274,000
Interest expense (719,000) (702,000)
Depreciation and amortization expense (1,147,000) (1,130,000)
---------- ----------
Income (loss) from hotel operations $ 191,000 $ (558,000)
========== ==========
-16-
For the three months ended September 30, 2008, the Hotel generated operating
income of approximately $2,057,000, before interest, depreciation and
amortization, on operating revenues of approximately $9,299,000 compared to
operating income of approximately $1,274,000 before interest, depreciation and
amortization, on operating revenues of approximately $9,786,000 for the three
months ended September 30, 2007. The increase in Hotel operating income is
primarily due to a significant decrease in operating expenses of approximately
$1,270,000, offset by a decrease in operating revenues of approximately
$487,000. The decrease in operating expenses is primarily attributable to
certain nonrecurring legal and consulting fees incurred in the prior period
related to construction litigation that was settled as of June 30, 2008 and for
zoning issues. Operating expenses also decreased due to a decline in hotel
occupancy during the current quarter and managements efforts to reduce costs.
That decline in occupancy was also the primary reason for the decrease in
operating revenues compared to the prior period.
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, 2008 and 2007.
Three Months Ended Average Average
September 30, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2008 $187 81% $152
2007 $177 89% $158
While the Hotel was able to achieve an increase of approximately $10 in its
average daily room rates for the three months ended September 30, 2008 compared
to the three months ended September 30, 2007, average occupancy percentage
declined approximately 8%, and Rev Par decreased by approximately $6 from the
comparable period. The operations of the Hotel began to feel the impact of the
dramatic downturn in the domestic and international economies and markets
during the first quarter and that impact is expected to continue through fiscal
2009. If that remains true, we expect Hotel operating revenues to be less than
fiscal 2008.
Facing the prospect of a recession and a decline in business, group and leisure
travel, both domestic and international, management has 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. As a
result of those efforts, we have seen further reductions in operating costs of
the Hotel as a percentage of Hotel revenues for the three months ended
September 30, 2008. Management will also increase its sales and marketing
efforts in what is expected to become an even more competitive hotel market in
San Francisco. Management will also continue to explore new and innovative
ways to improve operations and enhance the guest experience. One new concept
that Management has recently initiated is the opening of a new wine bar "Flyte"
in the lobby of the Hotel in August 2008.
Real estate operations improved to income of $178,000 for the three months
ended September 30, 2008 from income of $30,000 for the three months ended
September 30, 2007. The improvement was primarily attributable to the increase
in rental income and the decrease in interest expense partially offset by the
increase in operating expenses. Rental income increased to $3,226,000 from
$2,999,000 primarily due to the increased occupancy and rental rates as the
result of management's efforts to improve the competitiveness of the Company's
properties through interior and exterior improvements. The largest improvement
in rental income occurred at its 358-unit apartment located in Austin, Texas.
Operating expense increased to $1,273,000 from $1,092,000 as the result of the
improvements and providing better service. Interest expense decreased to
-17-
$860,000 from $942,000 primary as the result of a one-time expense of $59,000
related to the refinancing of the mortgage on the Company's newly renovated 30-
unit apartment complex located in Los Angeles, California during the quarter
ended September 30, 2007.
During the three months ended September 30, 2008, the Company had listed for
sale its 249-unit apartment complex located in Austin, Texas and its 132-unit
apartment complex located in San Antonio, Texas. The operations of these
properties are classified under discontinued operations in the condensed
consolidated statements of operations. During the three months ended September
30, 2007, the Company sold its 224-unit apartment complex located in Irving,
Texas for $8,050,000 and recognized a gain on the sale of real estate of
$4,074,000. The operations and the related gain on the sale of real estate are
also included under discontinued operations.
The Company had a net gain on marketable securities of $1,643,000 for the three
months ended September 30, 2008 compared to a net loss of $1,377,000 for the
three months ended September 30, 2007. For the three months ended September
30, 2008, the Company had a net realized gain of $1,082,000 and a net
unrealized loss of $561,000. For the three months ended September 30, 2007,
the Company had a net realized loss of $247,000 and net unrealized loss of
$1,130,000. 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.
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, 2008, the Company had net other investments of $6,556,000. During
the three months ended September 30, 2008 and 2007, 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 $595,000 and $125,000, respectively.
Margin interest and trading expenses decreased to $338,000 for the three months
ended September 30, 2008 from $432,000 for the three months ended September 30,
2007 primarily as the result of the decrease in margin interest expense to
$59,000 from $117,000. Margin interest expense decreased as the result of the
maintenance of lower margin balances.
Minority interest related to Justice Investors changed to a minority interest
expense of $96,000 for the three months ended September 30, 2008 compared to a
minority interest benefit $278,000 for the three months ended September 30,
2007. The change is due to the income generated from hotel operations of
$191,000 for the three months ended September 30, 2008 compared to a loss
incurred from hotel operations of $558,000 for the three months ended September
30, 2007.
The total provision for income tax expense decreased to $310,000 for the three
months ended September 30, 2008 from $621,000 for the three months ended
September 30, 2007 primarily as the result of the Company having a
significantly lower pre-tax income for the three months ended September 30,
2008 as compared to the three months ended September 30, 2007.
-18-
Minority interest related to Portsmouth and Santa Fe decreased to $212,000 for
the three months ended September 30, 2008 from $409,000 for the three months
ended September 30, 2007 primarily due to the lower loss incurred by Portsmouth
and Santa Fe during the three months ended September 30, 2008.
MARKETABLE SECURITIES AND OTHER INVESTMENTS
The Company's investment portfolio is diversified with 20 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 41% 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, 2008, the Company had investments in marketable equity
securities of $4,969,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
September 30, 2008 and June 30, 2008.
As of September 30, 2008
% of Total
Investment
Industry Group Fair Value Securities
-------------- ------------ ----------
Diary products $ 2,042,000 41.1%
Basic materials 1,431,000 28.8%
Financial 434,000 8.7%
Pharmaceuticals and healthcare 398,000 8.0%
Communications 244,000 4.9%
Other 420,000 8.5%
------------ ----------
$ 4,969,000 100.0%
============ ==========
As of June 30, 2008
% of Total
Investment
Industry Group Fair Value Securities
-------------- ------------ ----------
Dairy products $ 1,540,000 23.0%
Communications 1,123,000 16.7%
Financial 721,000 10.8%
Basic materials 654,000 9.8%
Medical 467,000 7.0%
Transportation 442,000 6.6%
Others 1,759,000 26.1%
---------- ------
$ 6,706,000 100.0%
========== ======
-19-
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, 2008 2007
-------------- --------------
Net gain(loss) on marketable securities $ 1,643,000 $ (1,377,000)
Impairment loss on other investments (595,000) (125,000)
Dividend & interest income 60,000 53,000
Margin interest expense (59,000) (117,000)
Trading and management expenses (279,000) (315,000)
------------ ------------
$ 770,000 $ (1,881,000)
============ ============
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, 2008, the Company had net other investments of $6,556,000.
During the three months ended September 30, 2008 and 2007, the Company made
investments in corporate debt instruments of a public company in the basic
materials sector totaling $750,000 and $125,000, respectively.
During the three months ended September 30, 2008 and 2007, the Company received
common stock issued upon conversion or as payment of interest and penalties on
convertible notes in this company. Through sales of this common stock, the
Company was able to recover approximately $1,871,000 and $40,000 of its
investments during the three months ended September 30, 2008 and 2007,
respectively. As of September 30, 2008, the Company had $828,000 of this
company's common stock included in its investment in marketable securities
balance of $4,969,000.
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 from the investment of its cash and marketable securities and from
its real estate operations during that transition period.
The Hotel started to generate cash flows from its operations in June 2006,
which have continued to improve since that time. 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. No limited partnership
distributions were paid in three months ended September 30, 2007. The general
partners expect to conduct regular reviews to set the amount of any future
distributions that may be appropriate based on the results of operations of the
Hotel and other factors, including establishment of reasonable reserves for
debt payments and operating contingencies. The recent dramatic downturn in
-20-
domestic and international economies and markets, and the prospect of a
prolonged recession, are expected to have a negative impact on the operating
results of the Hotel in fiscal 2009, which could reduce amounts available for
limited partnership distributions.
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
Prudential Loan is collateralized by a first deed of trust on the Partnership's
Hotel property, including all improvements and personal property thereon and an
assignment of all present and future leases and rents. The Prudential Loan is
without recourse to the limited and general partners of Justice. As of
September 30, 2008 the Prudential Loan balance was approximately $28,614,000.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential
(the "Second Prudential Loan") in the principal amount of $19,000,000. The term
of the Second Prudential Loan is for approximately 100 months and matures on
August 5, 2015, the same date as the first Prudential Loan. The Second
Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for
monthly installments of principal and interest in the amount of approximately
$119,000, calculated on a 30-year amortization schedule. The Second Prudential
Loan is collateralized by a second deed of trust on the Partnership's Hotel
property, including all improvements and personal property thereon and an
assignment of all present and future leases and rents. The Second Prudential
Loan is without recourse to the limited and general partners of Justice. As of
September 30, 2008, the Second Prudential Loan balance was approximately
$18,691,000.
The Partnership also obtained a new unsecured $3,000,000 revolving line of
credit facility from UCB to be utilized by the Partnership to meet any
emergency or extraordinary cash flow needs. The new line of credit facility
matures on February 2, 2009 and the annual interest rate is based on an index
selected by Justice at the time of advance, equal to the Wall Street Journal
Prime Rate less 0.5%, or the LIBOR Rate plus 2%. As of September 30, 2008,
there was a balance of $1,500,000 drawn by Justice under the new line of
credit, with an annual interest rate at Prime less 0.5% (4.00% as of September
30, 2008). It is expected that the Partnership will attempt to renew or extend
its line of credit facility with UCB or to obtain a replacement facility with
another lending institution in the near future.
While the debt service requirements related to the two Prudential loans, as
well as the utilization of the UCB line of credit, may create some additional
risk for the Company and its ability to generate cash flows in the future since
the Partnership's assets had been virtually debt free for an number of years,
management believes that cash flows from the operations of the Hotel and the
garage lease will continue to be sufficient to meet all of the Partnership's
current and future obligations and financial requirements. Management also
believes that there is sufficient equity in the Hotel assets to support future
borrowings, if necessary, to fund any new capital improvements and other
requirements.
-21-
In April 2004, the Company obtained a revolving $5,000,000 line of credit
("LOC"). The LOC carries a variable interest rate (lender's base rate plus
1%). Interest is paid on a monthly basis. During the three months ended
September 30, 2008, the outstanding balance on the line of credit of $3,462,000
was paid off.
In July 2008, the Company modified the mortgage on its 264-unit apartment
complex located in St. Louis, Missouri and borrowed an additional $500,000
bringing the outstanding of the note as of September 30, 2008 to $6,176,000.
The term and the interest rate on the note remain the same.
In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate
of $4,074,000. The Company received net proceeds after selling costs of
$7,739,000 and paid off the related outstanding mortgage note payable of
$4,007,000 and made a $3,000,000 payment to reduce its outstanding line of
credit to $1,258,000 from $4,258,000.
In August 2007, the Company refinanced its $7,203,000 construction loan on its
30-unit apartment complex located in Los Angeles, California and obtained a
mortgage note payable in the amount of $6,850,000. The term of the note is 15
years, with interest only for the first two years. The interest is fixed at
5.97%.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's marketable
securities are classified as trading with unrealized gains and losses recorded
through the consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows
generated from those assets and from its real estate operations, partnership
distributions and management fees, will be adequate to meet the Company's
current and future obligations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The Company does not have any material contractual obligations or commercial
commitments other than the mortgages of its rental properties, its line of
credit and Justice Investors' mortgage loans with Prudential and its revolving
line of credit facility with UCB.
IMPACT OF INFLATION
The Company's residential and commercial rental properties provide income from
short-term operating leases and no lease extends beyond one year. Rental
increases are expected to offset anticipated increased property operating
expenses.
Hotel room rates are typically impacted by supply and demand factors, not
inflation, since rental of a hotel room is usually for a limited number of
nights. Room rates can be, and usually are, adjusted to account for
inflationary cost increases. Since Prism has the power and ability under the
terms of its management agreement to adjust hotel room rates on an ongoing
-22-
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.
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
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.
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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.
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 11, 2008 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 11, 2008 by /s/ David Nguyen
------------------------------
David Nguyen, Treasurer
and Controller
(Principal Financial Officer)
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