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, 2004
[ ] 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 [ ]
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of November 10, 2004 were 2,476,686 shares.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
THE INTERGROUP CORPORATION
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (unaudited)
As Of September 30, 2004 3
Consolidated Statements of Operations (unaudited)
For the Three Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
-2-
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of September 30, 2004
-----------
ASSETS
Investment in real estate, at cost:
Land $ 29,609,000
Buildings, improvements and equipment 73,563,000
Property held for development 959,000
-----------
104,131,000
Less: accumulated depreciation (18,440,000)
-----------
85,691,000
Investment in Justice Investors 11,405,000
Cash and cash equivalents 1,949,000
Restricted cash 4,580,000
Investment in marketable securities 42,837,000
Prepaid expenses and other assets 2,193,000
Property intangible asset net of accum. amort. 389,000
-----------
Total assets $149,044,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable $ 79,983,000
Due to securities broker 19,629,000
Obligation for securities sold 6,485,000
Line of credit 5,000,000
Accounts payable and other liabilities 3,780,000
Deferred income taxes 8,008,000
-----------
Total liabilities 122,885,000
-----------
Minority interest 8,988,000
-----------
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, 2,476,686 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 15,531,000
Treasury stock, at cost, 717,059 shares (7,067,000)
-----------
Total shareholders' equity 17,171,000
-----------
Total liabilities and shareholders' equity $149,044,000
===========
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, 2004 2003
----------- -----------
Real estate operations:
Rental income $ 3,504,000 $ 2,879,000
Rental expenses:
Property operating expenses (1,533,000) (1,418,000)
Mortgage interest expense (1,065,000) (743,000)
Real estate taxes (412,000) (318,000)
Depreciation (716,000) (537,000)
Amortization - intangible asset (167,000) -
----------- -----------
Loss from real estate operations (389,000) (137,000)
Loss on early termination of debt (133,000) -
----------- -----------
(522,000) (137,000)
----------- -----------
Equity in net income of Justice Investors 77,000 208,000
----------- -----------
Investment transactions:
Net investment (losses)gains (4,627,000) 2,028,000
Dividend and interest income 292,000 151,000
Margin interest and trading expenses (576,000) (522,000)
----------- -----------
Income(loss) from investment transactions (4,911,000) 1,657,000
----------- -----------
Other income(expense):
General and administrative expenses (381,000) (358,000)
Other, net 86,000 13,000
----------- -----------
Other expense (295,000) (345,000)
----------- -----------
Income before provision for income
taxes and minority interest (5,651,000) 1,383,000
Provision for income tax benefit(expense) 2,260,000 (553,000)
----------- -----------
Income before minority interest (3,391,000) 830,000
Minority interest (expense)benefit 645,000 (213,000)
----------- -----------
Net (loss)income from continuing operations $ (2,746,000) $ 617,000
=========== ===========
Discontinued operations:
Net loss on discontinued operations $ (100,000) $ (27,000)
Gain on sale of real estate 6,006,000 -
Provision for income tax expense(benefit) (2,362,000) 11,000
----------- -----------
Income from discontinued operations $ 3,544,000 $ (16,000)
=========== ===========
Net income $ 798,000 601,000
=========== ===========
Income(loss) per share from continuing operations
Basic $ (1.10) $ 0.24
Diluted $ (0.96) -
=========== ===========
Income(loss) per share from discontinued operations
Basic $ 1.42 $ (0.01)
Diluted $ 1.24 $ (0.01)
=========== ===========
Net income per share
Basic $ 0.32 $ 0.24
Diluted $ 0.28 $ 0.21
=========== ===========
Weighted average number of shares outstanding 2,496,468 2,530,384
=========== ===========
Diluted weighted average number of shares
outstanding 2,862,468 2,863,384
=========== ===========
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, 2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 798,000 $ 601,000
Adjustments to reconcile net income to cash
provided by(cash used) in operating activities:
Depreciation of real estate 799,000 675,000
Amortization of intangible asset 167,000 -
Loss on early termination of debt 133,000 -
Gain on sale of real estate (6,006,000) -
Net unrealized losses(gains) on investments 4,751,000 (2,408,000)
Equity in net income from Justice Investors (77,000) (208,000)
Minority interest (benefit)expense (645,000) 213,000
Changes in assets and liabilities:
Restricted cash (1,027,000) 154,000
Investment in marketable securities 19,027,000 (5,089,000)
Prepaid expenses and other assets 1,665,000 (51,000)
Accounts payable and other liabilities (690,000) (1,355,000)
Due to broker (2,816,000) (3,131,000)
Obligation for securities sold (15,100,000) 8,995,000
Deferred income taxes 674,000 (154,000)
----------- -----------
Net cash provided by(used in)
operating activities 1,653,000 (1,758,000)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property 11,850,000 -
Investment in real estate (1,467,000) (700,000)
Additions to buildings, improvements
and equipment (875,000) (371,000)
Distributions from Justice Investors - 397,000
----------- -----------
Net cash provided by(used in)
investing activities 9,508,000 (674,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 1,675,000 4,215,000
Principal payments on mortgage notes payable (11,396,000) (2,400,000)
Purchase of treasury stock (268,000) -
Dividends paid to minority shareholders - (115,000)
----------- -----------
Net cash (used in) provided by
financing activities (9,989,000) 1,700,000
----------- -----------
Net increase(decrease) in cash and
cash equivalents 1,172,000 (732,000)
Cash and cash equivalents at beginning of
period 777,000 1,859,000
----------- -----------
Cash and cash equivalents at end of period $ 1,949,000 $ 1,127,000
=========== ===========
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, 2004 audited consolidated financial statements and notes
thereto.
As of September 30, 2004, the Company had the power to vote 75.2%, of the
voting shares of Santa Fe Financial Corporation ("Santa Fe"), a public company
(OTCBB: SFEF). Santa Fe's revenue is primarily generated through the management
of its 68.9% owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), a public
company (OTCBB: PRSI), which derives its revenue primarily as a general partner
and a 49.8% limited partner in Justice Investors, a California limited
partnership ("Justice" or the "Partnership"). Justice owns the land,
improvements and leaseholds commonly known as the Holiday Inn Select Downtown &
Spa, a 565-room hotel in San Francisco, California (the "Hotel").
The results of operations for the three months ended September 30, 2004 are not
necessarily indicative of results to be expected for the full fiscal year
ending June 30, 2005.
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, 2004, the
Company had 366,000 stock options that were considered potentially dilutive
common shares and 27,000 stock options that were considered anti-dilutive.
These amounts were included in the calculation for diluted earnings per share.
Stock-Based Compensation Plans
Effective December 15, 2002, the Company adopted Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure", which amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 148). In
accounting for its plans, the Company, as allowable under the provisions of
SFAS 148, applies Accounting Principles Board Opinions No. 25, "Accounting for
Stock issued to Employees." As a result of this election, the Company does not
recognize compensation expense for its stock option plans. Had the Company
determined compensation cost based on the fair value for its stock options at
grant date (based on 15,000 during the three months ended September 30, 2004),
net income and earnings per share would have been reduced to the pro forma
amounts as follows:
-6-
Net income $ 827,000
Stock based employee
Compensation expense* (62,000)
----------
Pro forma net income $ 765,000
==========
Earnings per share
Basic as reported $ 0.32
Basic pro forma $ 0.30
Diluted as reported $ 0.28
Diluted pro forma $ 0.27
*Determined under fair value based on method for awards net of related tax
effects (40%).
The Black-Scholes option pricing model was used with the following weighted-
average assumptions for the three months ended September 30, 2004; risk-free
interest rate of 2.60%; dividend yield of 0%; expected Common Stock market
price volatility factor of 31.37; and a weighted-average expected life of the
options of 10 years. The weighted-average fair value of options granted during
the three months ended September 30, 2004 was $6.95 per option. The aggregate
fair value of the options granted in during the three months ended September
30, 2004 was $104,000.
2. Investment in Real Estate
In August 2004, the Company purchased an approximately two acre parcel of
unimproved land in Kihei, Maui, Hawaii for $1,450,000. The land will be held
for sale or development.
In September 2004, the Company sold its 442-unit multi-family apartment complex
located in Houston, Texas for $11,850,000. The Company realized a gain of
$6,006,000 and received net proceeds of $1,364,000 after repayment of the
mortgage on the property, selling costs and attorneys' fees.
Under the provisions of the Statement of Financial Accounting Standards No.144,
Accounting for Impairment or Disposal of Long-Lived Assets, the sale of the
Houston, Texas property is required to be accounted for as a discontinued
operation. The revenues and expenses from the operation of the property have
been reclassified from continuing operations for the three months ended
September 30, 2004 and 2003 and reported as income from discontinued operations
in the consolidated statements of operations. Revenues and expenses from the
operation of the property for the three months ended September 30, 2004 and
2003 are summarized as follows:
2004 2003
---------- ----------
Revenues $ 361,000 $ 583,000
Expenses (461,000) (610,000)
---------- ----------
Net loss (100,000) ( 27,000)
========== ==========
Depreciation expense for the three months ended September 30, 2004 and 2003 for
this property was $83,000 and $138,000, respectively.
-7-
3. Marketable Securities:
The Company's investment portfolio consists primarily of corporate equities.
The Company has also invested in corporate bonds and income producing
securities, which may include interests in real estate based companies and
REITs, where financial benefit could inure to its shareholders through income
and/or capital gain.
At Septembr 30, 2004, all of the Company's marketable securities are classified
as trading securities. In accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the change in the
unrealized gains and losses on these investments are included earnings.
Trading securities are summarized as follows:
As of September 30, 2004
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $36,843,000 $10,237,000 ($4,243,000) $5,994,000 $42,837,000
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading with net change in unrealized gains or
losses included in earnings.
As part of the investment strategies, the Company may assume short positions in
marketable securities. Short sales are used by the Company to potentially
offset normal market risks undertaken in the course of its investing activities
or to provide additional return opportunities. The Company has no naked short
positions. As of September 30, 2004, the Company had obligations for
securities sold(equities short) of $6,485,000.
The Company may utilize margin for its marketable securities purchases through
the use of standard margin agreements with national brokerage firms. The use
of available leverage is guided by the business judgment of management.
Included in the net losses on marketable securities of $4,627,000 for the three
months ended September 30, 2004 are net unrealized losses of $4,751,000 and net
realized gains of $124,000. Included in the net gains on marketable securities
of $2,028,000 for the three months ended September 30, 2003 are net unrealized
gains of $2,408,000 and net realized losses of $380,000. There were no gross
unrealized losses on any securities held which existed for more than one year.
4. Investment in Justice Investors:
The consolidated accounts include a 49.8% interest in Justice Investors, a
California limited partnership ("Justice" or the "Partnership"), in which
Portsmouth serves as one of the two general partners. The other general
partner, Evon Garage Corporation, which recently changed its name to "Evon
Corporation" ("Evon"), serves as the managing general partner. Justice owns
the land, improvements and leaseholds at 750 Kearny Street, San Francisco,
California, commonly known as the Holiday Inn Select Downtown & Spa (the
"Hotel"). Portsmouth records its investment in Justice on the equity basis.
The Company amortizes the step up in the asset values 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.
-8-
As a general and limited partner, Portsmouth has significant control over the
management and operation of the assets of Justice. All significant partnership
decisions require the active participation and approval of both general
partners. The Portsmouth 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. Portsmouth is not entitled to any
additional voting rights by virtue of its position as a general partner.
The partnership agreement also provides that no portion of the partnership real
property can be sold without the written consent of the general and limited
partners entitled to more than 72% of the net profit.
Historically, Justice's most significant income source was a lease between the
Partnership and Felcor Lodging Trust, Inc. ("Felcor") for the hotel portion of
the property. Pursuant to a Settlement Agreement entered into on May 3, 2004,
Felcor agreed to terminate its lease and surrender possession of the Hotel to
Justice, on June 30, 2004. Effective July 1, 2004, Justice became the owner-
operator of the Hotel, with the assistance of a Management Agreement with Dow
Hotel Company, LLC. ("Dow") to perform the day-to day management functions of
the Hotel. The Partnership also derives income from the lease of the garage
portion of the property to Evon. Portsmouth also derives revenue from
management fees from Justice for actively managing the Hotel as a general
partner.
For the Company's investment in Justice, to the extent that projected future
undiscounted cash flows from the operation of the Hotel property are less than
the carrying value of the asset, the investment would be considered permanently
impaired and the carrying value of the asset would be reduced to its fair
value.
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
As of September 30, 2004
----------
Assets
Total current assets $ 4,456,000
Loan fees and deferred lease costs,
net of accumulated amortization of $6,000 266,000
Property, plant and equipment, net of
accumulated depreciation of $13,339,000 6,871,000
Construction in progress 234,000
Land 1,124,000
----------
Total assets $12,951,000
==========
Liabilities and partners' capital
Total current liabilities $ 77,000
Long-term debt 4,321,000
Other long-term debt 173,000
Partners' capital 8,380,000
----------
Total liabilities and partners' capital $12,951,000
==========
-9-
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended September 30, 2004 2003
---------- ----------
Revenues $ 4,719,000 $ 1,012,000
Costs and expenses (4,443,000) (474,000)
---------- ----------
Net income $ 276,000 $ 538,000
========== ==========
5. Mortgage Note Payable
In September 2004, the Company repaid a mortgage in the amount of $9,832,000 as
a part of the sale of its 442-unit multi-family apartment located Houston,
Texas.
In August 2004, the Company repaid a mortgage in the amount of $1,180,000 on
its 54-unit multi-family apartment located in Irving, Texas. Related to the
repayment of the mortgage, the Company incurred an early termination fee of
$133,000.
In August 2004, to facilitate the purchase of the Kihei, Maui, Hawaii property,
the Company obtained a loan in the amount of $750,000 with the balance of the
purchase price paid in cash. The loan is for a term of three years at a
floating interest rate equal to the bank's base rate (currently 4.5%) plus 1%.
Interest only is payable monthly.
6. Related Parties
John V. Winfield serves as Chief Executive Officer and Chairman of the Company,
Portsmouth, and Santa Fe. Depending on certain market conditions and various
risk factors, the Chief Executive Officer, his family, Portsmouth and Santa Fe
may, at times, invest in the same companies in which the Company invests. The
Company encourages such investments because it places personal resources of the
Chief Executive Officer and his family members, and the resources of Portsmouth
and Santa Fe, at risk in connection with investment decisions made on behalf of
the Company.
7. Segment Information
The Company operates in three reportable segments, the operations of its multi-
family residential properties, the operation of Justice Investors, and the
investment of its cash and securities assets. These three operating segments,
as presented in the financial statements, reflect how management internally
reviews each segment's performance. Management also makes operational and
strategic decisions based on this information.
Information below represents reported segments for the three months ended
September 30, 2004 and 2003. Operating income for rental properties consists
of rental income. Operating income from Justice Investors consists of the
operations of the hotel and garage included in the equity in net income of
Justice Investors. Operating income (losses) for investment transactions
consist of net investment gains(losses)and dividend and interest income.
-10-
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
September 30, 2004 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 3,504,000 $ 77,000 $(4,335,000) $ - $ (754,000) $ 361,000 $ (393,000)
Operating expenses (1,533,000) - (576,000) - (2,109,000) (217,000) (2,326,000)
Real estate taxes (412,000) - - - (412,000) ( 47,000) (459,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 1,559,000 77,000 (4,911,000) - (3,275,000) 97,000 (3,178,000)
Gain on sale of RE - - - - - 6,006,000 6,006,000
Loss on early term. of debt (133,000) - - - (133,000) - (133,000)
Mortgage interest expenses (1,065,000) - - - (1,065,000) (114,000) (1,179,000)
Depreciation (716,000) - - - (716,000) (83,000) (799,000)
Amort. of intangible asset (167,000) - - - (167,000) - (167,000)
General and administrative
expenses - - - (381,000) (381,000) - (381,000)
Other income - - - 86,000 86,000 - 86,000
Income tax expense - - - 2,260,000 2,260,000 (2,362,000) (102,000)
Minority interest - - - 645,000 645,000 - 645,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (522,000) $ 77,000 $(4,911,000) $ 2,610,000 $ (2,746,000) $ 3,544,000 $ 798,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $85,691,000 $11,405,000 $43,254,000 $ 8,694,000 $ 149,044,000 - $149,044,000
=========== =========== =========== =========== ============ ============ ============
Real Estate
-------------------------
Three months ended Rental Justice Investment Discontinued
September 30, 2003 Properties Investors Transactions Other Subtotal Operations Total
----------- ----------- ------------ ----------- ------------ ------------ ------------
Operating income(loss) $ 2,879,000 $ 208,000 $ 2,179,000 $ - $ 5,266,000 $ 583,000 $ 5,849,000
Operating expenses (1,418,000) - (522,000) - (1,940,000) (329,000) (2,269,000)
Real estate taxes (318,000) - - - (318,000) ( 58,000) (376,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) 1,143,000 208,000 1,657,000 - 3,008,000 196,000 3,204,000
Mortgage interest expenses (743,000) - - - (743,000) (85,000) (828,000)
Depreciation (537,000) - - - (537,000) (138,000) (675,000)
General and administrative
expenses - - - (358,000) (358,000) - (358,000)
Other income - - - 13,000 13,000 - 13,000
Income tax expense - - - (553,000) (553,000) 11,000 (542,000)
Minority interest - - - (213,000) (213,000) - (213,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (137,000) $ 208,000 $ 1,657,000 $(1,111,000) $ 617,000 $ (16,000) $ 601,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $63,366,000 $ 8,736,000 $62,435,000 $ 7,927,000 $ 142,464,000 - $142,464,000
=========== =========== =========== =========== ============ ============ ============
-11-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The discussion below and elsewhere in the Report includes forward-looking
statements about the future business results and activities of the Company,
which, by their very nature, involve a number of risks and uncertainties. When
used in this discussion, the words "estimate", "project", "anticipate" and
similar expressions, are subject to certain risks and uncertainties, such as
the impact of terrorism and war on the national and international economies,
including tourism and the securities markets, changes in general economic
conditions, interest rates, local real estate markets, and competition, as well
as uncertainties relating to uninsured losses, securities markets, and
litigation, including those discussed below and in the Company's Form 10-KSB
for the fiscal year ended June 30, 2004 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
For the Three Months Ended September 30, 2004 Compared to the
Three Months Ended September 30, 2003
The Company had net income of $798,000 for the three months ended September 30,
2004 compared to net income of $601,000 for the three months ended September
30, 2003. The increase in net income was primarily due to the gain on sale of
real estate, the increase in dividend and interest income and the change in
minority interest income, offset by the net investment losses, the increase in
the loss from real estate operations and the decrease in the equity in net
income of Justice Investors.
Rental income increased to $3,504,000 for the three months ended September 30,
2004 from $2,879,000 for the three months ended September 30, 2003 primarily
due to the inclusion of rental income the Company's 358-unit apartment in Las
Colinas, Texas that was acquired in April 2004. The increase was partially
offset by the reduction in rental income from the Company's Austin and Irving,
Texas properties. The reduction in rental income from these two properties was
due to higher vacancies and higher rent concessions given to tenants as the
result of the soft rental market. Property operating expenses increased to
$1,533,000 from $1,418,000 as the result the inclusion of operating expenses
related to the new property in the current quarter. Mortgage interest expense
increased to $1,065,000 from $743,000 primarily due to the addition of a
$20,000,000 mortgage related to the purchase of the Las Colinas, Texas property
partially offset by the repayment of the $1,180,000 mortgage on the Irving,
Texas property. Real estate taxes and depreciation expense also increased
primarily as the result of the purchase of the Las Colinas, Texas property.
The amortization expense of $167,000 was due to the amortization of the
intangible asset acquired along with the purchase of the Las Colinas, Texas
property.
The Company incurred a loss on early termination of debt in the amount of
$133,000 as the result of the repayment of the $1,180,000 mortgage on its
property located in Irving, Texas.
-12-
In September 2004, the Company sold its 442-unit multi-family apartment complex
located in Houston, Texas for $11,850,000. The Company realized a gain of
$6,006,000 on the sale. The gain on the sale and the operations of the
property for the three months ended September 20, 2004 and 2003 were required
to be reported as discontinued operations on the Statement of Operations.
Equity in net income of Justice Investors decreased to $77,000 from $208,000.
Effective July 1, 2004, the Justice became the owner-operator of the Hotel
rather than a lessor. Thus, the Partnership net income for the first quarter
of fiscal 2004 includes the direct operating results of the Hotel, whereas in
the prior year Justice received rental income from Felcor pursuant to a lease.
Net operating income from the Hotel for the three months ended September 30,
2004 was approximately $305,000. The overall decrease in Partnership net
income was primarily attributable to a decrease in income from the Hotel and
increased costs in the current quarter related to the repositioning of the
Hotel and additional depreciation and interest costs related to the build-out
of the new spa and meeting rooms in the Hotel and other capital improvements.
Average daily room rates for the Hotel increased to approximately $97 for the
three months ended September 30, 2004, compared to approximately $90 for the
three months ended September 30, 2003, while average monthly occupancy rates
decreased to approximately 75% from approximately 79% in the prior period.
Those results reflect the efforts of the Partnership and its hotel management
company, Dow, to attract higher rated individual business travelers. Overall,
the hotel business in the San Francisco Bay Area has lagged behind the recovery
seen in other major cities in the United States due to the continued weakness
in the local economy and a decline in international travel. The Hotel has also
faced more competition from new properties and from higher end properties that
provide greater amenities to its guests, especially for the business traveler.
The Partnership is committed to making the Hotel competitive in its market by
undertaking a significant renovation of the property and seeking a new, more
upscale, brand for the Hotel.
Net investment gains(losses) on marketable securities changed to net losses of
$4,627,000 for the three months ended September 30, 2004 from net gains of
$2,028,000 for the three months ended September 30, 2003. For the three months
ended September 30, 2004, the Company had net unrealized losses of $4,751,000
and net realized gains of $124,000. For the three months ended September 30,
2003, the Company had net unrealized gains of $2,408,000 and net realized
losses of $380,000. 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 increased to $292,000 from $151,000 as a result of
the increased investment in dividend yielding securities.
Other income increased to $86,000 from $13,000 primarily due to the receipt of
$69,000 from Justice Investors for management's involvement in the positioning
of the hotel.
Net income tax expense (from continuing and discontinued operations combined)
decreased to $102,000 from $542,000 as the result of the significantly lower
income before taxes generated in three months ended September 30, 2004 as
compared to the three months ended September 30, 2003.
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Minority interest benefit(expense) changed to a benefit of $645,000 from an
expense of $213,000 due to the loss incurred by the Company's subsidiary, Santa
Fe, in the current quarter ended September 30, 2004 as compared to income
generated in the quarter ended September 30, 2003.
MARKETABLE SECURITIES
The Company's investment portfolio is diversified with 85 different equity
positions. Only two equity securities are more than 5% of the equity value of
the portfolio, with the largest being 7%. 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, 2004, the Company had investments in marketable equity
securities of $42,837,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
September 30, 2004.
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Electric, pipelines, oil and gas $11,283,000 26.3%
REITs, Lodging, home builders, and
Hotels 6,754,000 15.8%
Airlines and defense 6,628,000 15.5%
Pharmaceuticals and medical 5,494,000 12.8%
Insurance and banks 3,676,000 8.6%
Chemicals, materials, metals,
and mining 2,950,000 6.9%
Telecommunications and media 2,810,000 6.6%
Apparel, food and consumer goods 2,443,000 5.7%
Other 799,000 1.8%
---------- ------
$42,837,000 100.0%
========== ======
The following table shows the net gain or loss on the Company's marketable
securities and the associated margin interest and trading expenses for the
three months ended September 30, 2004 and September 30, 2003, respectively.
Three months ended Three months ended
September 30, 2004 September 30, 2003
------------ ------------
Net (losses)gains on marketable
securities $ (4,627,000) $ 2,028,000
Dividend & interest income 292,000 151,000
Margin interest expense (252,000) (318,000)
Trading and management expenses (324,000) (204,000)
------------ ------------
Investment (loss)income $ (4,911,000) $ 1,657,000
============ ============
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FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are generated primarily from its real estate
activities, sales of investment securities and borrowings related to both.
During the three months ended September 30, 2004, operating activities
generated cash of $1,653,000, investing activities provided cash of $9,508,000
and financing activities used cash of $9,989,000.
During the three months ended September 30, 2004, the Company made property
improvements in the aggregate amount of $875,000. Management believes the
improvements to its properties will enhance market values, maintain the
competitiveness of the Company's properties and potentially enable the Company
to obtain a higher yield through higher rents.
In September 2004, the Company sold its 442-unit multi-family apartment complex
located in Houston, Texas for $11,850,000. The Company realized a gain of
$6,006,000 and received net proceeds of $1,364,000 after repayment of the
mortgage of $9,832,000 on the property, selling costs and attorneys' fees.
In August 2004, the Company repaid the mortgage in the amount of $1,180,000 on
its 54-unit multi-family apartment located in Irving, Texas. Related to the
repayment of the mortgage, the Company incurred an early termination fee of
$133,000.
In August 2004, the Company purchased an approximately two acre parcel of
unimproved land in Kihei, Maui, Hawaii for $1,450,000. The land will be held
for sale or development. To facilitate the purchase of the property, the
Company obtained a loan in the amount of $750,000 with the balance of the
purchase price paid in cash. The loan is for a term of three years at a
floating interest rate equal to the bank's base rate (currently 4.5%) plus 1%.
Interest only is payable monthly.
The Company's Board of Directors has given the Company the authority to
repurchase, from time to time, shares of its Common Stock. Such repurchases
may be made at the discretion of management and depending on market conditions.
During the three months ended September 30, 2004, the Company purchased 20,000
shares of its stock for $268,000.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's marketable
securities are classified as trading with unrealized gains and losses recorded
through the statement of operations.
Management believes that the net cash flow generated from future operating
activities and its capital resources will be adequate to meet its current and
future obligations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
The Company also does not have any material contractual obligations or
commercial commitments.
-15-
IMPACT OF INFLATION
The Company's residential and commercial rental properties provide income from
short-term operating leases and no lease extends beyond one year. Rental
increases are expected to offset anticipated increased property operating
expenses.
Hotel room rates are typically impacted by supply and demand factors, not
inflation, since rental of a hotel room is usually for a limited number of
nights. Room rates can be, and usually are, adjusted to account for
inflationary cost increases. To the extent that the hotel lessee is able to
adjust room rates, there should be minimal impact on partnership revenues due
to inflation. Partnership revenues are also subject to interest rate risks,
which may be influenced by inflation. For the two most recent fiscal years,
the impact of inflation on the Company's income is not viewed by management as
material.
CRITICAL ACCOUNTING POLICIES
The Company reviews its long-lived assets and other investments for impairment
when circumstances indicate that a potential loss in carrying value may have
occurred. To the extent that projected future undiscounted cash flows from the
operation of the Company's hotel property, owned through the Company's
investment in Justice Investors, and rental properties are less than the
carrying value of the asset, the carrying value of the asset is reduced to its
fair value. For other investments, the Company reviews the investment's
operating results, financial position and other relevant factors to determine
whether the estimated fair value of the asset is less than the carrying value
of the asset.
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading with net unrealized gains or losses
included in earnings.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company's Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Quarterly Report on Form 10-QSB. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed in this filing is accumulated and communicated to management and is
recorded, processed, summarized and reported in a timely manner and in
accordance with Securities and Exchange Commission rules and regulations.
(b) Internal Control Over Financial Reporting.
There have been no changes in the Company's internal control over financial
reporting during the last quarterly period covered by this Quarterly Report on
Form 10-QSB that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
-16-
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
Number of Average as Part of Publicly Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
--------------------------------------------------------------------------------------
Month #1
(July 1- - - - 22,941
July 31)
--------------------------------------------------------------------------------------
Month #2
(Aug. 1- - - - 22,941
Aug. 31)
--------------------------------------------------------------------------------------
Month #3
(Sept. 1- 20,000 $13.42 20,000 2,941
Sept. 30)
--------------------------------------------------------------------------------------
Total 20,000 $13.42 20,000 2,941
--------------------------------------------------------------------------------------
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.
-17-
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) Registrant did not file any reports on Form 8-K during the period
covered by this report.
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 12, 2004 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 12, 2004 by /s/ David T. Nguyen
------------------------------
David T. Nguyen, Treasurer
and Controller
(Principal Accounting Officer)
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