10QSB 1 ig10q33103.txt THE INTERGROUP CORPORATION FORM 10-QSB MARCH 31, 2003 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 Or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2003 [ ] 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 May 14, 2003 were 2,674,384 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 March 31, 2003 3 Consolidated Statements of Operations (unaudited) For the Three Months Ended March 31, 2003 and 2002 4 Consolidated Statements of Operations (unaudited) For the Nine months Ended March 31, 2003 and 2002 5 Consolidated Statements of Cash Flows (unaudited) For the Nine months Ended March 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Controls and Procedures 20 Part II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Shareholders. 21 Item 5. Other Information. 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 22 -2- THE INTERGROUP CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) As of March 31, 2003 ----------- Assets Investment in real estate, at cost: Land $ 25,704,000 Buildings, improvements and equipment 54,283,000 Property held for sale or development 914,000 ----------- 80,901,000 Less: accumulated depreciation (18,016,000) ----------- 62,885,000 Investment in Justice Investors 9,482,000 Cash and cash equivalents 968,000 Restricted cash 1,482,000 Investment in marketable securities 12,908,000 Prepaid expenses and other assets 2,598,000 ----------- Total assets $ 90,323,000 =========== Liabilities and Shareholders' Equity Liabilities Mortgage notes payable $ 57,890,000 Due to securities broker 2,023,000 Obligation for securities sold 4,364,000 Accounts payable and other liabilities 3,703,000 Deferred income taxes 2,595,000 ----------- Total liabilities 70,575,000 ----------- Minority interest 9,954,000 ----------- 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, 2,674,384 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 7,632,000 Note receivable - stock options (1,438,000) Treasury stock, at cost, 519,361 shares (5,107,000) ----------- Total shareholders' equity 9,794,000 ----------- Total liabilities and shareholders' equity $ 90,323,000 ===========
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 March 31, 2003 2002 ----------- ----------- Real estate operations: Rental income $ 3,689,000 $ 3,099,000 Rental expenses: Property operating expenses (1,589,000) (1,597,000) Mortgage interest expense (873,000) (792,000) Real estate taxes (408,000) (354,000) Depreciation (690,000) (631,000) ----------- ----------- Income(loss) from real estate operations 129,000 (275,000) ----------- ----------- Equity in net income of Justice Investors 361,000 372,000 ----------- ----------- Investment transactions: Net investment losses (1,341,000) (1,955,000) Dividend and interest income 119,000 75,000 Margin interest and expenses (318,000) (393,000) ----------- ----------- Loss from investment transactions (1,540,000) (2,273,000) ----------- ----------- Other income(expense): General and administrative expenses (418,000) (430,000) Other income(expense) (37,000) 55,000 ----------- ----------- Other expense (455,000) (375,000) ----------- ----------- Loss before provision for income taxes and minority interest (1,505,000) (2,551,000) Provision for income tax benefit 616,000 1,050,000 ----------- ----------- Loss before minority interest (889,000) (1,501,000) Minority interest 191,000 164,000 ----------- ----------- Net loss $ (698,000) $ (1,337,000) =========== =========== Basic loss per share $ (0.26) $ (0.47) =========== =========== Weighted average number of shares outstanding 2,704,300 2,821,360 =========== =========== Diluted loss per share $ (0.26) $ (0.47) =========== =========== Diluted weighted average number of shares outstanding 2,704,300 2,821,360 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -4- THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the nine months ended March 31, 2003 2002 ----------- ----------- Real estate operations: Rental income $ 10,677,000 $ 9,531,000 Rental expenses: Property operating expenses (4,947,000) (4,721,000) Mortgage interest expense (2,596,000) (2,565,000) Real estate taxes (1,201,000) (953,000) Depreciation (2,054,000) (1,852,000) ----------- ----------- (121,000) (560,000) Gain on sale of real estate - 10,277,000 ----------- ----------- Income(loss) from real estate operations (121,000) 9,717,000 ----------- ----------- Equity in net income of Justice Investors 1,232,000 1,757,000 ----------- ----------- Investment transactions: Net investment losses (2,052,000) (12,695,000) Dividend and interest income 260,000 232,000 Margin interest and trading expenses (782,000) (1,393,000) ----------- ----------- Loss from investment transactions (2,574,000) (13,856,000) ----------- ----------- Other income (expense): General and administrative expenses (1,394,000) (1,352,000) Other income (expense) 9,000 (142,000) ----------- ----------- Other expense (1,385,000) (1,494,000) ----------- ----------- Loss before provision for income taxes and minority interest (2,848,000) (3,876,000) Provision for income tax benefit 1,139,000 1,578,000 ----------- ----------- Loss before minority interest (1,709,000) (2,298,000) Minority interest 246,000 1,663,000 ----------- ----------- Net loss $ (1,463,000) $ (635,000) =========== =========== Basic loss per share $ (0.53) $ (0.23) =========== =========== Weighted average number of shares outstanding 2,737,452 2,816,376 =========== =========== Diluted loss per share $ (0.53) $ (0.23) =========== =========== Diluted weighted average number of shares outstanding 2,737,452 2,816,376 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -5- THE INTEGROUP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months Ended March 31, 2003 2002 ----------- ----------- Cash flows from operating activities: Net loss $ (1,463,000) $ (635,000) Adjustments to reconcile net loss to cash used in operating activities: Depreciation of real estate 2,054,000 1,852,000 Gain on sale of real estate - (10,277,000) Net unrealized (gains)losses on investments (2,033,000) 8,605,000 Equity in net income from Justice Investors (1,232,000) (1,757,000) Minority interest (246,000) (1,663,000) Changes in assets and liabilities: Restricted cash (510,000) 25,000 Investment in marketable securities (3,481,000) 7,275,000 Other investments - (442,000) Prepaid expenses and other assets (1,390,000) (448,000) Accounts payable and other liabilities (545,000) (1,859,000) Due to broker 1,444,000 8,980,000 Obligations for securities sold 3,873,000 (15,415,000) Deferred income taxes 1,066,000 (957,000) ----------- ----------- Net cash used in operating activities (2,463,000) (6,716,000) ----------- ----------- Cash flows from investing activities: Additions to buildings, improvements and equipment (933,000) (2,635,000) Investment in real estate (53,000) (4,852,000) Proceeds from sale of real estate - 13,862,000 Distributions from Justice Investors 1,498,000 2,719,000 ----------- ----------- Net cash provided by investing activities 512,000 9,094,000 ----------- ----------- Cash flows from financing activities: Principal payments on mortgage notes payable (4,157,000) (5,083,000) Borrowings from mortgage notes payable 10,118,000 2,732,000 Repayment of line of credit (4,000,000) - Purchase of treasury stock (799,000) (223,000) Dividends paid to minority shareholders (126,000) (126,000) ----------- ----------- Net cash provided by(used in) financing activities 1,036,000 (2,700,000) ----------- ----------- Net decrease in cash and cash equivalents (915,000) (322,000) Cash and cash equivalents at beginning of period 1,883,000 878,000 ----------- ----------- Cash and cash equivalents at end of period $ 968,000 $ 556,000 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -6- 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, 2002 audited consolidated financial statements and notes thereto. As of March 31, 2003, the Company had the power to vote 58.8% of the voting shares of Santa Fe Financial Corporation ("Santa Fe"), a public company (Nasdaq SmallCap: SFEF). Santa Fe's revenue is primarily generated through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), which derives its revenue primarily as a general partner and a 49.8% limited partner in Justice Investors ("Justice"), a California limited partnership. Justice owns the land, improvements and leaseholds known as the Holiday Inn Financial District/Chinatown, a 566-room hotel in San Francisco, California. In November 2002, The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 ("FIN 45"), Guarantor s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which requires elaborating on the disclosures that must be made by a guarantor in its financial statements about its obligations under certain guarantees. It also requires that a guarantor recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 were required at December 31, 2002 and the recognition requirements of FIN 45 are applicable for guarantees issued or modified after December 31, 2002. Management does not believe FIN 45 will have a material impact on the Company's financial statements. In January 2003, The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Management does not believe FIN 46 will have a material impact on the Company's financial statements. FIN 46 defines variable interest entities as a corporation, partnership, trusts, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. -7- In December 2002, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, which amends FAS 123, Accounting for Stock-Based Compensation. In response to a growing number of companies announcing plans to record expenses for the fair value of stock options, FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 148. In accounting for its plans, the Company, as allowable under the provisions of SFAS No. 148, applies Accounting Principles Board Opinion 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. The pro forma disclosures will be included in our audited financials statements for the year ended June 30, 2003. In April 2003, The Financial Accounting Standards Board (FASB) issued FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (FAS 149). FAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133. The new guidance amends FAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to FAS 133, (b) in connection with other Board projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an "underlying" and the characteristics of a derivative that contains financing components. The amendments set forth in FAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. Management does not believe FAS 149 will have a material impact on the Company's financial statements. Certain reclassifications have been made to the financial statements as of March 31, 2003 and for the three and nine months then ended to conform to the financial statements as of and for the three and nine months ended March 31, 2002 presentation. The results of operations for the three and nine months ended March 31, 2003 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2003. 2. Marketable Securities: 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. For the three months ended March 31, 2003, net losses on marketable securities of $1,341,000 included net unrealized gains of $249,000 and net realized losses of $1,590,000. For the three months ended March 31, 2002, net losses on marketable securities of $1,955,000 included net unrealized losses of $1,929,000 and net realized losses of $26,000. -8- For the nine months ended March 31, 2003, net losses on marketable securities of $2,052,000 included net unrealized gains of $2,033,000 and net realized losses of $4,085,000. For the nine months ended March 31, 2002, net losses on marketable securities of $12,695,000 included net unrealized losses of $8,605,000 and net realized losses of $4,090,000. 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. 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. The Company's investment in marketable securities as of March 31, 2003 is composed of following types of securities: % of Total Market Value Portfolio ------------ --------- Corporate bonds $ 373,000 2.9% Common stocks 12,535,000 97.1% ----------- -------- Total marketable securities $12,908,000 100.0% =========== ======== 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 March 31, 2003, the Company had obligations for securities sold (equities short) of $4,364,000. 3. Investment in Justice Investors: The consolidated accounts include a 49.8% interest in Justice Investors, a California limited partnership ("Justice Investors"), in which Portsmouth serves as one of the two general partners. The other general partner, Evon Garage Corporation ("Evon"), serves as the managing general partner. As a general and limited partner, Portsmouth has significant control over the management and operation of the assets of Justice Investors. All significant partnership decisions require the active participation and approval of both general partners. The Company and Evon jointly consult and determine the amount of partnership reserves and the amount of cash to be distributed to the limited partners. The partnership derives most of its income from a lease of its San Francisco, California hotel property to Felcor Lodging Trust, Inc. ("Felcor") and from a lease of the garage portion of the property to Evon. As a general partner, the Company and its subsidiaries are active in monitoring and overseeing the operations of the hotel and parking garage. -9- Pursuant to the terms of the partnership agreement, voting rights of the partners are determined according to the partners' entitlement to share in the net profit and loss of the partnership. The Company is not entitled to any additional voting rights by virtue of its position as a general partner. The partnership agreement also provides that no portion of the partnership real property can be sold without the written consent of the general and limited partners entitled to more than 72% of the net profit. The compensation agreement for the general partners of Justice Investors provides that the general partners are entitled to receive compensation equal to 3% of the annual gross rents of the partnership. From the first $150,000 of compensation payable to the general partners, $120,000 is payable to Evon Garage Corporation and $30,000 is payable to Portsmouth as the other general partner. Any compensation in excess of the $150,000 is to be split 50/50 between the general partners. The partnership makes monthly advances of $10,000 to Evon and $2,500 to Portsmouth with any balance adjusted at the end of the year based on annual gross revenues. For the three and nine months ended March 31, 2003, the Company received $7,500 and $22,500, respectively, in management fees from Justice Investors. The Company's accounting policy for assessing and measuring impairment of the Company's investment in Justice is to review all recent sales of hotels in the San Francisco area and compare them to the Hotel owned by Justice. Management also reviews the monthly and quarterly performance of the hotel (cash flow, occupancy levels, average room rate, parking revenues, etc.,) to determine if impairment of the hotel has occurred. As of March 31, 2003, no impairment write down is considered necessary. Condensed financial statements for Justice Investors are as follows: JUSTICE INVESTORS CONDENSED BALANCE SHEET As of March 31, 2003 ---------- Assets Total current assets $ 128,542 Property, plant and equipment, net of accumulated depreciation of $12,512,052 5,660,150 Loan fees and deferred lease costs, net of accumulated amortization of $249,081 61,331 ---------- Total assets $ 5,850,023 ========== Liabilities and partners' capital Total current liabilities $ 174,135 Long term debt 2,182,202 Partners' capital 3,493,686 ---------- Total liabilities and partners' capital $ 5,850,023 ========== -10- JUSTICE INVESTORS CONDENSED STATEMENTS OF OPERATIONS For the three months ended March 31, 2003 2002 ---------- ---------- Revenues $ 938,564 $ 949,992 Costs and expenses (213,379) (204,084) ---------- ---------- Net income $ 725,185 $ 745,908 ========== ========== For the nine months ended March 31, 2003 2002 ---------- ---------- Revenues $ 3,031,632 $ 4,173,176 Costs and expenses (557,989) (645,308) ---------- ---------- Net income $ 2,473,643 $ 3,527,868 ========== ========== 4. Commitments and Contingencies: The Company is a defendant or co-defendant in various other legal actions involving various claims incident to the conduct of its business. Most of these claims are covered by insurance. Management does not anticipate the Company to suffer any material liability by reason of such actions. 5. Related Parties John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Portsmouth, and Santa Fe. Depending on certain market conditions and various risk factors, the Chief Executive Officer, his family, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and his family members, and the resources of Portsmouth and Santa Fe, at risk in connection with investment decisions made on behalf of the Company. In May 1996, the Company's Chairman and President exercised options to purchase 187,500 shares of Common Stock at a price of $7.67 per share through a full recourse note due to the Company on demand with a due date of May 16, 2003. The note bears interest floating at the lower of 10% or the prime rate (4.75% at March 31, 2003) with interest payable quarterly. The balance of the note receivable of $1,438,000 is reflected as a reduction of shareholders' equity at March 31, 2003. The Board of the Directors is considering proposals for the satisfaction of the note receivable and it is expected that the note receivable will be satisfied on or before the due date of May 16, 2003. -11- 6. Earnings Per Share On March 31, 2003, the Company effectuated a three-for-two stock split of its Common Stock in the form of a 50% stock dividend. Any resulting fractional shares were paid in cash. The prior period comparative number of shares outstanding for the purpose of computing earnings per share have been adjusted for the stock split. Basic earnings per share are 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 the Company reported a loss for the three and nine months ended March 31, 2003, the inclusion of potentially dilutive common shares related to stock options (192,000 shares at March 31, 2003) would be anti-dilutive. 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 and nine months ended March 31, 2003 and the three and nine months ended March 31, 2002. Operating income for rental properties consist 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.
Real Estate ------------------------- Three months ended Rental Justice Investment March 31, 2003 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 3,689,000 $ 361,000 $(1,222,000) $ - $ 2,828,000 Operating expenses (1,589,000) - (318,000) - (1,907,000) Real estate taxes (408,000) - - (408,000) ----------- ----------- ----------- ----------- ------------ 1,692,000 361,000 (1,540,000) - 513,000 Mortgage interest expenses (873,000) - - - (873,000) Depreciation (690,000) - - - (690,000) General and administrative expenses - - - (418,000) (418,000) Other income - - - (37,000) (37,000) Income tax benefit - - - 616,000 616,000 Minority interest - - - 191,000 191,000 ----------- ----------- ----------- ----------- ------------ Net income(loss) $ 129,000 $ 361,000 $(1,540,000) $ 352,000 $ (698,000) =========== =========== =========== =========== ============ Total Assets $62,885,000 $ 9,482,000 $13,208,000 $ 4,748,000 $ 90,323,000 =========== =========== =========== =========== ============
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Real Estate ------------------------- Three months ended Rental Justice Investment March 31, 2002 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 3,099,000 $ 372,000 $ (1,880,000) $ - $ 1,591,000 Operating expenses (1,597,000) - (393,000) - (1,990,000) Real estate taxes (354,000) - - - (354,000) ----------- ----------- ------------ ----------- ------------ 1,148,000 372,000 (2,273,000) - (753,000) Mortgage interest expenses (792,000) - - - (792,000) Depreciation (631,000) - - - (631,000) General and administrative expenses - - - (430,000) (430,000) Other income - - - 55,000 55,000 Income tax benefit - - - 1,050,000 1,050,000 Minority interest - - - 164,000 164,000 ----------- ----------- ------------ ----------- ------------ Net income(loss) $ (275,000) $ 372,000 $ (2,273,000) $ 839,000 $ (1,337,000) =========== =========== ============ =========== ============ Total Assets $64,478,000 $ 9,975,000 $ 28,820,000 $ 3,772,000 $107,045,000 =========== =========== ============ =========== ============
Real Estate ------------------------- Nine months ended Rental Justice Investment March 31, 2003 Properties Investors Transactions Other Total ----------- ----------- ----------- ----------- ------------ Operating income(loss) $10,677,000 $ 1,232,000 $(1,792,000) $ - $ 10,117,000 Operating expenses (4,947,000) - (782,000) - (5,729,000) Real estate taxes (1,201,000) - - (1,201,000) ----------- ----------- ----------- ----------- ------------ 4,529,000 1,232,000 (2,574,000) - 3,187,000 Mortgage interest expenses (2,596,000) - - - (2,596,000) Depreciation (2,054,000) - - - (2,054,000) General and administrative expenses - - - (1,394,000) (1,394,000) Other income - - - 9,000 9,000 Income tax benefit - - - 1,139,000 1,139,000 Minority interest - - - 246,000 246,000 ----------- ----------- ----------- ----------- ------------ Net income (loss) $ (121,000) $ 1,232,000 $(2,574,000) $ - $ (1,463,000) =========== =========== =========== =========== ============ Total Assets $62,885,000 $ 9,482,000 $13,208,000 $ 4,748,000 $ 90,323,000 =========== =========== =========== =========== ============
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Real Estate ------------------------- Nine months ended Rental Justice Investment March 31, 2002 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 9,531,000 $ 1,757,000 $(12,463,000) $ - $ (1,175,000) Operating expenses (4,721,000) - (1,393,000) - (6,114,000) Real estate taxes (953,000) - - - (953,000) ----------- ----------- ------------ ----------- ------------ 3,857,000 1,757,000 (13,856,000) - (8,242,000) Mortgage interest expenses (2,565,000) - - - (2,565,000) Depreciation (1,852,000) - - - (1,852,000) General and administrative expenses - - - (1,352,000) (1,352,000) Gain on sale of real estate 10,277,000 - - - 10,277,000 Other expenses - - - (142,000) (142,000) Income tax benefit - - - 1,578,000 1,578,000 Minority interest - - - 1,663,000 1,663,000 ----------- ----------- ------------ ----------- ------------ Net income(loss) $ 9,717,000 $ 1,757,000 $(13,856,000) $ 1,747,000 $ (635,000) =========== =========== ============ =========== ============ Total Assets $64,478,000 $ 9,975,000 $ 28,820,000 $ 3,772,000 $107,045,000 =========== =========== ============ =========== ============
8. Subsequent Event On April 17, 2003, the Company entered into a stipulation and order for dismissal of an insurance coverage lawsuit following the consummation of a settlement, which was reached at a mediation proceeding. From a total settlement of $2,700,000, the Company received net proceeds of approximately $2,235,000, on April 22, 2003, after the payment of attorneys' fees and other costs incurred in the action. The Company will record the net settlement amounts as other income in the fourth quarter of its fiscal year ending June 30, 2003, which was the period in which they were received. -14- 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, 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, 2002 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 March 31, 2003 Compared to the Three Months Ended March 31, 2002 The Company had a net loss of $698,000 for the three months ended March 31, 2003 compared to net loss of $1,337,000 for the three months ended March 31, 2002. This was primarily due to the decrease in the loss from real estate operations, a decrease in net investment losses, a decrease in margin interest and trading expenses and an increase in dividend and interest income. Rental income increased to $3,689,000 from $3,099,000 primarily due to an increase in occupancy at the Austin, Texas property as a result of the completion of its renovation. The increase was also due to the overall increase in occupancy levels at several other properties partially offset by a decrease in occupancy at the Florissant, Missouri property. The increase in rental expenses to $3,560,000 from $3,374,000 was primarily due to the nominal increases in real estate taxes and depreciation at the individual properties. The equity in net income of Justice Investors did not change significantly. The recovery of the tourism and the hospitality industry has been especially slow in San Francisco due to the continued weak economy in the Bay Area. In addition, the hotel has faced increased competition from new properties and from higher end properties that have cut room rates in an effort to keep their share of a declining market. For the three months ended March 31, 2003, average daily room rates decreased 15% to $93 from $109 in the prior year's quarter, while average occupancy increased 19% to 57% from 48% in the prior year's quarter. -15- The Company had net investment losses of $1,341,000 for the three months ended March 31, 2003 compared to net investment losses of $1,955,000 for the three months ended March 31, 2002. For the three months ended March 31, 2003, net losses on marketable securities of $1,341,000 included net unrealized gains of $249,000 and net realized losses of $1,590,000. For the three ended March 31, 2002, net losses on marketable securities of $1,955,000 included net unrealized losses of $1,929,000 and net realized losses of $26,000. 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 investment portfolio, please see the Marketable Securities Section below. Dividend and interest income increased to $119,000 from $75,000 as a result of the increased investment in dividend yielding securities. Margin interest and trading expenses decreased to $318,000 from $393,000 primarily due to the reduction of trading related expenses. Income tax benefit decreased to $616,000 from $1,050,000 due a lower loss incurred by the Company. For the Nine months Ended March 31, 2003 Compared to the Nine months Ended March 31, 2002 The Company had a net loss of $1,463,000 for the nine months ended March 31, 2003 compared to a net loss of $635,000 for the nine months ended March 31, 2002. This was primarily due to the gain on sale of real estate in the prior period and a decline in income of Justice Investors, offset by a significant decline in investment losses, the decrease in margin interest and trading expenses and a decrease in other expenses. Rental income changed to a loss of $121,000 from income of $9,717,000 primarily due to a gain on sale of real estate of $10,277,000 related to the sale of the St. Louis, Missouri property in the prior period. There were no real estate sales in the current quarter. Rental revenues increased to $10,677,000 from $9,531,000 as the result of improved occupancy at several of the Company's properties with the most significant occupancy improvements at the Austin, Texas, San Antonio, Texas, and Meadowbrook, New Jersey properties. The increases were partially offset by the sale of the St. Louis, Missouri property. Total property related expenses increased to $10,798,000 from $10,091,000 as of the result in the increase in repairs and maintenance related to the occupancy increase and due to a nominal increase in real estate taxes at several properties in our real estate portfolio. The decrease in equity in net income of Justice Investors to $1,232,000 for the nine months ended March 31, 2003 from $1,757,000 for the nine months ended March 31, 2002 is primarily attributable to a the inclusion of approximately $300,000 in equity in net income of Justice Investors from an arbitration settlement payment from the hotel leasee in the period ended March 31, 2002 and to a decline in hotel revenues. The terrorist attacks of September 11, 2001, had a devastating effect on tourism and the hospitality industry, especially in San Francisco where recovery has been especially slow due to the weak economy in the Bay Area. In addition, the hotel has faced increased competition from new properties and from higher end properties that have cut -16- room rates in an effort to keep their share of a declining market. For the nine months ended March 31, 2003, average daily room rates decreased 21% to $92 from $116 for the nine months ended March 31, 2002, while average occupancy increased 8% to 66% from 61%. Net investment losses decreased to $2,052,000 for the nine months ended March 31, 2003 from net losses of $12,695,000 for the nine months ended March 31, 2002. For the nine months ended March 31, 2003, net losses on marketable securities of $2,052,000 included net unrealized gains of $2,033,000 and net realized losses of $4,085,000. For the nine months ended March 31, 2002, net losses on marketable securities of $12,695,000 included net unrealized losses of $8,605,000 and net realized losses of $4,090,000. 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 investment portfolio, please see the Marketable Securities Section below. Dividend and interest income increased to $260,000 from $232,000 as a result of the increased investment in dividend yielding securities. Margin interest and trading expenses decreased to $782,000 from $1,393,000 primarily due to the reduction of trading related expenses. Other income (expenses) changed to income of $9,000 from an expense of $142,000 in the prior period primarily due to the payment of $236,000 during the nine months end March 31, 2002 for legal expenses related to the Howard Jaffe case. Income tax benefit decreased to $1,139,000 from $1,578,000 due a lower loss incurred by the Company. Minority interest decreased to $246,000 from $1,663,000 as a result of lower net loss incurred by the Company's subsidiary, Santa Fe, during the nine months ended March 31, 2003. MARKETABLE SECURITIES The Company invests from time to time in corporate debt and equity securities, mortgage backed securities, securities issued by REIT's and other companies, which invest primarily in real estate. The following table sets forth the composition of the Company's investment portfolio as of March 31, 2003: % of Total Market Value Portfolio ------------ --------- Corporate bonds $ 373,000 2.9% Common stocks 12,535,000 97.1% ----------- -------- Total marketable securities $12,908,000 100.0% =========== ======== -17- The following table shows the composition of the Company's investment securities portfolio by selected industry groups as of March 31, 2003. % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Electric, pipelines, oil and gas $ 3,662,000 28.4% Telecommunications 3,202,000 24.8% Semiconductor, software, internet, and computer 1,951,000 15.1% Chemicals, materials, metals, and mining 1,468,000 11.4% Media and entertainment 591,000 4.6% Airlines and defense 598,000 4.6% Other 1,436,000 11.1% ---------- ------ $12,908,000 100.0% ========== ====== The Company's investment portfolio is diversified with 119 different equity positions. Only one individual equity securities comprise more than 5% of the equity value of the portfolio, with the largest being 12%. 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. 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 quarters ended March 31, 2003 and 2002. Three months ended Three months ended March 31, March 31, 2003 2002 ------------ ------------ Net invest losses $ (1,341,000) $ (1,955,000) Dividend & interest income 41,000 29,000 Margin interest (156,000) (51,000) Trading and management expenses (162,000) (342,000) ------------ ------------ Investment income (loss) $ (1,540,000) $ (2,273,000) ============ ============ Nine months ended Nine months ended March 31, March 31, 2003 2002 ------------ ------------ Net invest losses $ (2,052,000) $(12,695,000) Dividend & interest income 260,000 232,000 Margin interest (352,000) (244,000) Trading and management expenses (430,000) (1,149,000) ------------ ------------ Investment loss $ (2,574,000) $(13,856,000) ============ ============ -18- 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 Nine months ended March 31, 2003, the Company used net cash flow of $2,463,000 from operating activities, generated net cash flow of $512,000 from investing activities, and generated net cash flow of $1,036,000 from financing activities. During the nine months ended March 31, 2003, the Company made property improvements in the aggregate amount of $933,000. Management believes the improvements to its properties will enhance market values, maintain the competitiveness of the Company's properties and potentially enable the Company to obtain a higher yield through higher rents. The Company's Board of Directors has given the Company the authority to repurchase, from time to time, up to a total of 333,000 shares (adjusted for two stock splits) of its Common Stock. Such repurchases may be made at the discretion of management and depending upon market conditions. During the nine months ended March 31, 2003, the Company purchased 67,030 shares of treasury stock for total of $799,000. On February 10, 2003, the Board increased the number of shares the Company is authorized to repurchase by an additional 150,000 shares. The events of September 11, 2001 and the continuing threats of terrorism and war have had a dramatic impact on the domestic and global economies resulting in a significant decline in securities markets. Although the Company's investment portfolio felt part of that impact, management anticipates that its net cash flow from real estate operations, securities transactions and real estate financing activities will be sufficient to fund any property acquisitions, property improvements, debt service requirements and operating expenses in fiscal year 2003. The Company has no off balance sheet arrangements. The Company also does not have any material contractual obligations or commercial commitments. 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. -19- 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) Evaluation of disclosure controls and procedures. The management of the Company, including the Chief Executive Officer and the Vice President Finance (acting as Chief Financial Officer), have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this Quarterly Report on Form 10-QSB (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Valuation Date, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. Subsequent to the date of the evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, nor were there any corrective actions required with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION Item 1. Legal Proceedings The following is furnished to update information previously reported in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2002 and its quarterly report on Form 10-QSB for the quarterly period ended December 31, 2002. Continental Casualty Company v. The InterGroup Corporation and John V. Winfield; United States District Court, Central District of California, Case No. 01-01034. On April 17, 2003, the parties entered into a stipulation and order for dismissal of the above-entitled action with prejudice following the -20- consummation of a settlement, which was reached at a mediation proceeding. From a total settlement of $2,700,000 million, InterGroup received net proceeds of approximately $2,235,000, on April 22, 2003, after the payment of attorneys' fees and other costs incurred in the action. The Company will record the net settlement amounts as other income in the fourth quarter of its fiscal year ending June 30, 2003, which was the period in which they were received. Item 4. Submission of Matters to a Vote of Shareholders. The Annual Meeting of the Shareholders of the Company was held on February 26, 2003, at the Luxe Summit Hotel Bel-Air, 11461 Sunset Blvd., Los Angeles, California 90049. At that meeting, management's nominees for Class C Directors: Mildred Bond Roxborough and John C. Love, were elected to serve until the fiscal 2005 Annual Meeting, with each nominee receiving in excess of 99% of the shares voted. At that Meeting, the shareholders also voted in favor of the ratification of the Audit Committee's selection of PricewaterhouseCoopers LLP as the independent accountants of the Company for the fiscal year ending June 30, 2003. A tabulation of the vote follows: Proposal (1) - Class C Directors: Votes For Withheld --------- -------- Mildred Bond Roxborough 1,080,343 9,998 William J. Nance 1,080,343 9,998 Proposal (2) - Accountants: Votes For Against Abstained --------- ------- --------- PricewaterhouseCoopers LLP 1,086,466 3,011 864 Item 5. Other Information. On February 10, 2003, the Board of Directors authorized the Company to purchase up to an additional 150,000 shares of the Company's common stock under its existing stock repurchase program. That action increased the total remaining number of shares authorized for repurchase to approximately 229,050, after the stock split discussed below. The purchases will be made, in the discretion of management, from time to time in the open market or through privately negotiated third party transactions depending on market conditions. On February 26, 2003, the Board of Directors authorized a three-for-two stock split of the Company's common stock in the form of a 50% stock dividend. The record date for the stock dividend was March 17, 2003, with a distribution date of March 31, 2003. Any fractional shares resulting from the stock dividend were paid in cash. On February 26, 2003, the Company's Controller, David Nguyen, was named as Treasurer of the Company and its subsidiaries, Santa Fe Financial Corporation and Portsmouth Square, Inc. Effective March 7, 2003, Gregory C. McPherson, resigned from his positions of Executive Vice President and Assistant Treasurer and as an employee of the Company in order to pursue other interests. -21- Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 99.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) The Company filed the following Reports on Form 8-K - During the quarter ended March 31, 2003: Date of Report Item Reported Description ---------------- ------------------- ------------------ February 11, 2003 Item 5. Other Events Press Release on and Regulation FD Increase in Stock Disclosure Repurchase Program March 3, 2003 Item 5. Other Events Press Release on and Regulation FD Stock Split in Form Disclosure of Stock Dividend March 31, 2003 Item 5. Other Events Implementation of Stock Split in Form of Stock Dividend SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE INTERGROUP CORPORATION (Registrant) Date: May 15, 2003 by /s/ John V. Winfield ---------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: May 15, 2003 by /s/ David T. Nguyen ------------------------------ David T. Nguyen, Treasurer and Controller (Principal Accounting Officer) -22- CERTIFICATION I, John V. Winfield, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of The InterGroup Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designated such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for registrant's auditors and material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ John V. Winfield ---------------------- John V. Winfield President and Chief Executive Officer -23- CERTIFICATION I, David T. Nguyen, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of The InterGroup Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designated such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for registrant's auditors and material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ David T. Nguyen -------------------------- David Nguyen, Treasurer and Controller (serving as Chief Financial Officer) -24- 10 Page 1 of 24