-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R3K9pVeGibuXFbdXnTdAlH6tRBJJ8NkM0dGlx4ycsvBcviufQNv//BfxJ21oJBHB UaXWgPiLUvGMO+SLByEu0A== 0000086759-05-000005.txt : 20050214 0000086759-05-000005.hdr.sgml : 20050214 20050211194806 ACCESSION NUMBER: 0000086759-05-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050214 DATE AS OF CHANGE: 20050211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGROUP CORP CENTRAL INDEX KEY: 0000069422 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 133293645 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-10324 FILM NUMBER: 05601443 BUSINESS ADDRESS: STREET 1: 820 MORAGA DRIVE STREET 2: - CITY: LOS ANGELES, STATE: CA ZIP: 90049-1632 BUSINESS PHONE: (310) 889-2500 MAIL ADDRESS: STREET 1: 820 MORAGA DRIVE CITY: LOS ANGELES STATE: CA ZIP: 90049-1632 FORMER COMPANY: FORMER CONFORMED NAME: MUTUAL REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19860408 10QSB 1 ig10q123104.txt INTERGROUP FORM 10-QSB 12-31-04 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 December 31, 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 February 10, 2005 were 2,430,186 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 December 31, 2004 3 Consolidated Statements of Operations (unaudited) For the Three Months Ended December 31, 2004 and 2003 4 Consolidated Statements of Operations (unaudited) For the Six Months Ended December 31, 2004 and 2003 5 Consolidated Statements of Cash Flows (unaudited) For the Three Months Ended December 31, 2004 and 2003 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Controls and Procedures 20 Part II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 22 -2- THE INTERGROUP CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) As of December 31, 2004 ----------- ASSETS Investment in real estate, at cost: Land $ 29,609,000 Buildings, improvements and equipment 74,466,000 Property held for development 994,000 ----------- 105,069,000 Less: accumulated depreciation (19,153,000) ----------- 85,916,000 Investment in Justice Investors 11,048,000 Cash and cash equivalents 1,005,000 Restricted cash 3,396,000 Investment in marketable securities 66,526,000 Prepaid expenses and other assets 2,904,000 Property intangible asset net of accum. amort. 222,000 ----------- Total assets $171,017,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Mortgage notes payable $ 80,393,000 Due to securities broker 26,873,000 Obligation for securities sold 15,295,000 Line of credit 6,413,000 Accounts payable and other liabilities 5,441,000 Deferred income taxes 8,796,000 ----------- Total liabilities 143,211,000 ----------- Minority interest 9,243,000 ----------- 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, 2,436,686 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 17,458,000 Treasury stock, at cost, 757,059 shares (7,602,000) ----------- Total shareholders' equity 18,563,000 ----------- Total liabilities and shareholders' equity $171,017,000 =========== 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 December 31, 2004 2003 ----------- ----------- Real estate operations: Rental income $ 3,508,000 $ 2,467,000 Rental expenses: Property operating expenses (1,699,000) (1,448,000) Mortgage interest expense (1,111,000) (863,000) Real estate taxes (767,000) (301,000) Depreciation (711,000) (500,000) Amortization - intangible asset (166,000) - ----------- ----------- Loss from real estate operations (946,000) (645,000) ----------- ----------- Equity in net income(loss) of Justice Investors (357,000) 236,000 ----------- ----------- Investment transactions: Net investment gains 6,705,000 6,583,000 Impairment loss on other investments (258,000) - Dividend and interest income 199,000 223,000 Margin interest and trading expenses (824,000) (1,932,000) ----------- ----------- Income from investment transactions 5,822,000 4,874,000 ----------- ----------- Other income(expense): General and administrative expenses (321,000) (483,000) Other, net 8,000 49,000 ----------- ----------- Other expense (313,000) (434,000) ----------- ----------- Income before provision for income taxes and minority interest 4,206,000 4,031,000 Provision for income tax expense (1,683,000) (1,613,000) ----------- ----------- Income before minority interest 2,523,000 2,418,000 Minority interest expense (596,000) (444,000) ----------- ----------- Net income from continuing operations $ 1,927,000 $ 1,974,000 =========== =========== Discontinued operations: Net loss on discontinued operations $ - $ (30,000) Gain on sale of real estate - - Provision for income tax benefit - 12,000 ----------- ----------- Loss from discontinued operations $ - $ (18,000) =========== =========== Net income $ 1,927,000 $ 1,956,000 =========== =========== Income per share from continuing operations Basic $ 0.78 $ 0.78 Diluted $ 0.68 $ 0.69 =========== =========== Loss per share from discontinued operations Basic $ - $ (0.01) Diluted $ - $ (0.01) =========== =========== Net income per share Basic $ 0.78 $ 0.78 Diluted $ 0.68 $ 0.68 =========== =========== Weighted average number of shares outstanding 2,470,532 2,522,585 =========== =========== Diluted weighted average number of shares outstanding 2,838,032 2,855,585 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -4- THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Six Months ended December 31, 2004 2003 ----------- ----------- Real estate operations: Rental income $ 7,012,000 $ 5,346,000 Rental expenses: Property operating expenses (3,232,000) (2,866,000) Mortgage interest expense (2,176,000) (1,606,000) Real estate taxes (1,179,000) (619,000) Depreciation (1,427,000) (1,037,000) Amortization - intangible asset (333,000) - Loss on early termination of debt (133,000) - ----------- ----------- Loss from real estate operations (1,468,000) (782,000) ----------- ----------- Equity in net income(loss) of Justice Investors (280,000) 444,000 ----------- ----------- Investment transactions: Net investment gains 2,078,000 8,611,000 Impairment on other investments (258,000) - Dividend and interest income 491,000 374,000 Margin interest and trading expenses (1,400,000) (2,454,000) ----------- ----------- Income from investment transactions 911,000 6,531,000 ----------- ----------- Other income(expense): General and administrative expenses (702,000) (841,000) Other, net 94,000 62,000 ----------- ----------- Other expense (608,000) (779,000) ----------- ----------- Income(loss) before provision for income taxes and minority interest (1,445,000) 5,414,000 Provision for income tax benefit(expense) 577,000 (2,166,000) ----------- ----------- Income(loss) before minority interest (868,000) 3,248,000 Minority interest benefit(expense) 49,000 (657,000) ----------- ----------- Net (loss)income from continuing operations $ (819,000) $ 2,591,000 =========== =========== Discontinued operations: Net loss on discontinued operations $ (100,000) $ (57,000) Gain on sale of real estate 6,006,000 - Provision for income tax expense(benefit) (2,362,000) 23,000 ----------- ----------- Income from discontinued operations $ 3,544,000 $ (34,000) =========== =========== Net income $ 2,725,000 $ 2,557,000 =========== =========== Income(loss) per share from continuing operations Basic $ (0.33) $ 1.03 Diluted $ (0.29) 0.91 =========== =========== Income(loss) per share from discontinued operations Basic $ 1.43 $ (0.01) Diluted $ 1.24 $ (0.01) =========== =========== Net income per share Basic $ 1.10 $ 1.01 Diluted $ 0.96 $ 0.89 =========== =========== Weighted average number of shares outstanding 2,483,751 2,526,442 =========== =========== Diluted weighted average number of shares outstanding 2,851,251 2,859,442 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -5- THE INTEGROUP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended December 31, 2004 2003 ----------- ----------- Cash flows from operating activities: Net income $ 2,725,000 $ 2,557,000 Adjustments to reconcile net income to cash provided by(cash used) in operating activities: Depreciation of real estate 1,510,000 1,317,000 Amortization of intangible asset 333,000 - Loss on early termination of debt 133,000 - Gain on sale of real estate (6,006,000) - Net unrealized gains on investments (1,573,000) (5,319,000) Equity in net income from Justice Investors 280,000 (444,000) Minority interest expense (49,000) 657,000 Changes in assets and liabilities: Restricted cash 157,000 745,000 Investment in marketable securities 1,366,000 (24,472,000) Prepaid expenses and other assets 956,000 269,000 Accounts payable and other liabilities 971,000 (437,000) Due to broker 4,428,000 9,951,000 Obligation for securities sold (6,290,000) 12,857,000 Deferred income taxes 1,462,000 1,397,000 ----------- ----------- Net cash provided by(used in) operating activities 403,000 (922,000) ----------- ----------- 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 (1,813,000) (803,000) Distributions from Justice Investors - 636,000 Purchase of Santa Fe stock (44,000) (923,000) ----------- ----------- Net cash provided by(used in) investing activities 8,526,000 (1,790,000) ----------- ----------- Cash flows from financing activities: Borrowings from mortgage notes payable 1,675,000 8,275,000 Principal payments on mortgage notes payable (10,986,000) (5,126,000) Borrowings from line of credit 1,413,000 - Purchase of treasury stock (803,000) (252,000) Dividends paid to minority shareholders - (115,000) ----------- ----------- Net cash (used in) provided by financing activities (8,701,000) 2,782,000 ----------- ----------- Net increase in cash and cash equivalents 228,000 70,000 Cash and cash equivalents at beginning of period 777,000 1,859,000 ----------- ----------- Cash and cash equivalents at end of period $ 1,005,000 $ 1,929,000 =========== =========== 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, 2004 audited consolidated financial statements and notes thereto. As of December 31, 2004, the Company had the power to vote 75.5%, 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 and six months ended December 31, 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 December 31, 2004, the Company had 367,500 stock options that were considered potentially dilutive common shares and 25,500 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 16,500 during the six months ended December 31, 2004), net income and earnings per share would have been reduced to the pro forma amounts as follows: -7- Net income $ 2,725,000 Stock based employee Compensation expense* (68,000) ---------- Pro forma net income $ 2,657,000 ========== Earnings per share Basic as reported $ 1.10 Basic pro forma $ 1.07 Diluted as reported $ 0.96 Diluted pro forma $ 0.93 *Determined based on the fair value 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 six months ended December 31, 2004; risk-free interest rate of 3.01%; dividend yield of 0%; expected Common Stock market price volatility factor of 25.89; and a weighted-average expected life of the options of 10 years. The weighted-average fair value of options granted during the six months ended December 31, 2004 was $6.93 per option. The aggregate fair value of the options granted in during the six months ended December 31, 2004 was $114,000. The Company is currently evaluating the impact of Financial Accounting Standard 123R,"Share-Based Payments". 2. Investment in Real Estate 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 and six months ended December 31, 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 and six months ended December 31, 2004 and 2003 are summarized as follows: For three months ended December 31, 2004 2003 ---------- ---------- Revenues $ - $ 614,000 Expenses - (644,000) ---------- ---------- Net loss - (30,000) ========== ========== For six months ended December 31, 2004 2003 ---------- ---------- Revenues $ 361,000 $ 1,197,000 Expenses (461,000) (1,254,000) ---------- ---------- Net loss (100,000) (57,000) ========== ========== Depreciation expense for the three months ended December 31, 2004 and 2003, was $83,000 and $142,000, respectively. Depreciation expense for the six months ended December 31, 2004 and 2003, was $83,000 and $280,000, respectively. -8- 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 December 31, 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 December 31, 2004 Gross Gross Net Market Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value - ---------- ----------- --------------- --------------- --------------- ------------ Corporate Equities $52,026,000 $17,770,000 ($3,270,000) $14,500,000 $66,526,000
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 December 31, 2004, the Company had obligations for securities sold(equities short) of $15,295,000. 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 gains on marketable securities of $6,705,000 for the three months ended December 31, 2004 are net unrealized gains of $6,324,000 and net realized gains of $381,000. Included in the net gains on marketable securities of $6,583,000 for the three months ended December 31, 2003 are net unrealized gains of $2,911,000 and net realized gains of $3,672,000. There were no gross unrealized losses on any securities held which existed for more than one year. Included in the net gains on marketable securities of $2,078,000 for the six months ended December 31, 2004 are net unrealized gains of $1,573,000 and net realized gains of $505,000. Included in the net gains on marketable securities of $8,611,000 for the six months ended December 31, 2003 are net unrealized gains of $5,319,000 and net realized gains of $3,292,000. 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 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. -9- 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. 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 and from a lease on the lobby level of the Hotel to Tru Spa. The Company also derives revenue from management fees from Justice for actively managing the hotel as a 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. 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. In May of 2004, a $5,000,000 settlement payment was made to Justice from the hotel lessee to resolve disputes regarding certain obligations of Felcor and others under the terms of the Hotel Lease. That settlement payment is being held in a separate partnership account and will be applied towards the costs of capital repairs, replacements and improvements necessary to place the hotel in the condition required by the Hotel Lease at the end of its term. The Partnership expects to utilize all of the settlement proceeds for such during fiscal 2005, which may impact the Company's equity in net income of Justice Investors for fiscal 2005. On December 10, 2004, Justice entered into a Franchise License Agreement for the right to operate the Hotel property as a Hilton brand hotel. Prior to operating the hotel as a Hilton, the Partnership is required to make substantial renovations to the hotel to meet Hilton standards in accordance with a product improvement plan agreed upon by Hilton and the Partnership, as well as complying with other brand standards. The Partnership estimates that the cost of the renovations will range from approximately $22 million to $24 million. The Agreement requires that those renovations be complete and the Hotel commence operations as a Hilton hotel no later than June 1, 2006. The term of the Agreement is for a period of 15 years commencing on the opening date, with an option to extend the license term for another five years, subject to certain conditions. 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. -10- 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 (Unaudited) As of December 31, 2004 ---------- Assets Cash $ 4,517,000 Other current assets 1,067,000 Property, plant and equipment, net of accumulated depreciation of $13,488,000 7,092,000 Construction in progress 647,000 Land 1,124,000 ---------- Total assets $14,447,000 ========== Liabilities and partners' capital Total current liabilities $ 1,862,000 Long-term debt 4,780,000 Other long-term libilities 35,000 Partners' capital 7,770,000 ---------- Total liabilities and partners' capital $14,447,000 ========== JUSTICE INVESTORS CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended December 31, 2004 2003 ---------- ---------- Hotel revenue $ 3,452,000 $ - Hotel rent - 625,000 Garage rent 244,000 301,000 Other income(expense) 69,000 379,000 Operating expenses (4,406,000) (712,000) ---------- ---------- Net income(loss) $ (641,000) $ 593,000 ========== ========== For the six months ended December 31, 2004 2003 ---------- ---------- Hotel revenue $ 7,806,000 $ - Hotel rent - 1,250,000 Garage rent 549,000 674,000 Other income(expense) 129,000 393,000 Operating expenses (8,849,000) (1,186,000) ---------- ---------- Net income(loss) $ (365,000) $ 1,131,000 ========== ========== -11- 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 December 31, 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. Real Estate ------------------------- Three months ended Rental Justice Investment Discontinued December 31, 2004 Properties Investors Transactions Other Subtotal Operations Total ----------- ----------- ------------ ----------- ------------ ------------ ------------ Operating income(loss) $ 3,508,000 $ (357,000) $ 6,904,000 $ - $ 10,055,000 $ - $ 10,055,000 Operating expenses (1,699,000) - (1,082,000) - (2,781,000) - (2,781,000) Real estate taxes (767,000) - - - (767,000) - (767,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net operating income(loss) 1,042,000 (357,000) 5,822,000 - 6,507,000 - 6,507,000 Mortgage interest expenses (1,111,000) - - - (1,111,000) - (1,111,000) Depreciation (711,000) - - - (711,000) - (711,000) Amort. of intangible asset (166,000) - - - (166,000) - (166,000) General and administrative expenses - - - (321,000) (321,000) - (321,000) Other income - - - 8,000 8,000 - 8,000 Income tax expense - - - (1,683,000) (1,683,000) - (1,683,000) Minority interest - - - (596,000) (596,000) - (596,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net income(loss) $ (946,000) $ (357,000) $ 5,822,000 $(2,592,000) $ 1,927,000 $ - $ 1,927,000 =========== =========== =========== =========== ============ ============ ============ Total Assets $85,916,000 $11,048,000 $68,118,000 $ 5,935,000 $ 171,017,000 - $171,017,000 =========== =========== =========== =========== ============ ============ ============
-12- Real Estate ------------------------- Three months ended Rental Justice Investment Discontinued December 31, 2003 Properties Investors Transactions Other Subtotal Operations Total ----------- ----------- ------------ ----------- ------------ ------------ ------------ Operating income(loss) $ 2,467,000 $ 236,000 $ 6,806,000 $ - $ 9,509,000 $ 614,000 $ 10,123,000 Operating expenses (1,448,000) - (1,932,000) - (3,380,000) (357,000) (3,737,000) Real estate taxes (301,000) - - - (301,000) (82,000) (383,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net operating income(loss) 718,000 236,000 4,874,000 - 5,828,000 175,000 6,003,000 Mortgage interest expenses (863,000) - - - (863,000) (63,000) (926,000) Depreciation (500,000) - - - (500,000) (142,000) (642,000) General and administrative expenses - - - (483,000) (483,000) - (483,000) Other income - - - 49,000 49,000 - 49,000 Income tax benefit(expense) - - - (1,613,000) (1,613,000) 12,000 (1,601,000) Minority interest - - - (444,000) (444,000) - (444,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net income(loss) $ (645,000) $ 236,000 $ 4,874,000 $(2,491,000) $ 1,974,000 $ (18,000) $ 1,956,000 =========== =========== =========== =========== ============ ============ ============ Total Assets $63,156,000 $ 8,945,000 $84,730,000 $ 7,818,000 $ 164,649,000 - $164,649,000 =========== =========== =========== =========== ============ ============ ============
Real Estate ------------------------- Six months ended Rental Justice Investment Discontinued December 31, 2004 Properties Investors Transactions Other Subtotal Operations Total ----------- ----------- ------------ ----------- ------------ ------------ ------------ Operating income(loss) $ 7,012,000 $ (280,000) $ 2,569,000 $ - $ 9,301,000 $ 361,000 $ 9,662,000) Operating expenses (3,232,000) - (1,658,000) - (4,890,000) (217,000) (5,107,000) Real estate taxes (1,179,000) - - - (1,179,000) ( 47,000) (1,226,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net operating income(loss) 2,601,000 (280,000) 911,000 - 3,232,000 97,000 3,329,000 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 (2,176,000) - - - (2,176,000) (114,000) (2,290,000) Depreciation (1,427,000) - - - (1,427,000) (83,000) (1,510,000) Amort. of intangible asset (333,000) - - - (333,000) - (333,000) General and administrative expenses - - - (702,000) (702,000) - (702,000) Other income - - - 94,000 94,000 - 94,000 Income tax expense - - - 577,000 577,000 (2,362,000) (1,785,000) Minority interest - - - 49,000 49,000 - 49,000 ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net income(loss) $(1,468,000) $ (280,000) $ 911,000 $ 18,000 $ (819,000) $ 3,544,000 $ 2,725,000 =========== =========== =========== =========== ============ ============ ============ Total Assets $85,916,000 $11,048,000 $68,118,000 $ 5,935,000 $ 171,017,000 - $171,017,000 =========== =========== =========== =========== ============ ============ ============
Real Estate ------------------------- Six months ended Rental Justice Investment Discontinued December 31, 2003 Properties Investors Transactions Other Subtotal Operations Total ----------- ----------- ------------ ----------- ------------ ------------ ------------ Operating income(loss) $ 5,346,000 $ 444,000 $ 8,985,000 $ - $ 14,775,000 $ 1,197,000 $ 15,972,000 Operating expenses (2,866,000) - (2,454,000) - (5,320,000) (686,000) (6,006,000) Real estate taxes (619,000) - - - (619,000) (140,000) (759,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net operating income(loss) 1,861,000 444,000 6,531,000 - 8,836,000 371,000 9,207,000 Mortgage interest expenses (1,606,000) - - - (1,606,000) (148,000) (1,754,000) Depreciation (1,037,000) - - - (1,037,000) (280,000) (1,317,000) General and administrative expenses - - - (841,000) (841,000) - (841,000) Other income - - - 62,000 62,000 - 62,000 Income tax expense - - - (2,166,000) (2,166,000) 23,000 (2,143,000) Minority interest - - - (657,000) (657,000) - (657,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net income(loss) $ (782,000) $ 444,000 $ 6,531,000 $(3,602,000) $ 2,591,000 $ (34,000) $ 2,557,000 =========== =========== =========== =========== ============ ============ ============ Total Assets $63,156,000 $ 8,945,000 $84,730,000 $ 7,818,000 $ 164,649,000 - $164,649,000 =========== =========== =========== =========== ============ ============ ============
-13- 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 December 31, 2004 Compared to the Three Months Ended December 31, 2003 The Company had net income of $1,927,000 for the three months ended December 31, 2004 compared to net income of $1,956,000 for the three months ended December 31, 2003. The decrease in net income was primarily due to the increase in the loss from real estate operations, the change in equity in income(loss) of Justice Investors to a loss and the increase in minority interest, partially offset by the increase in net investment gains, the decrease in margin interest and trading expenses and the decrease in general and administrative expenses. Rental income increased to $3,508,000 for the three months ended December 31, 2004 from $2,467,000 for the three months ended December 31, 2003 primarily due to the inclusion of rental income in the current quarter of the Company's 358- unit apartment in Las Colinas, Texas that was acquired in April 2004 and the exclusion from rental income in the comparable quarter of the Houston, Texas property that was sold in September 2004. The revenues and expenses of the Houston, Texas property were excluded from the real estate operations and required to be included under discontinued operations. The increase in rental income 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 $1,699,000 from $1,488,000 primarily as the result of the inclusion of operating expenses related to the new property in the current quarter. Mortgage interest expense increased to $1,111,000 from $863,000 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 $166,000 was due to the amortization of the intangible asset acquired along with the purchase of the Las Colinas, Texas property. -14- Equity in net income(loss) of Justice Investors changed to a loss of $357,000 from income of $236,000. Effective July 1, 2004, Justice became the owner- operator of the Hotel rather than a lessor. Thus, the Partnership net income for the three months ended December 31, 2004 includes the direct operating results of the Hotel, whereas in the prior year Justice received rental income from Felcor pursuant to a lease. The net operating loss from the Hotel for the three months ended December 31, 2004 was approximately $490,000 while the Partnership received approximately $625,000 in rent from the Hotel lease for the three months ended December 31, 2003. The overall decrease in Partnership net income was primarily attributable to the net operating loss from the Hotel and increased costs in the current quarter related to professional fees for 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 decreased to approximately $88 for the three months ended December 31, 2004, compared to approximately $92 for the three months ended December 31, 2003, while average monthly occupancy rates remained relatively flat at approximately 64%. Those results primarily reflect the inability of the Hotel to currently meet its competition. The Hotel is facing 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 entering into a new License Agreement to operate the Hotel as a Hilton Brand hotel after the renovation is complete. In addition, 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. Net investment gains on marketable securities increased to $6,705,000 for the three months ended December 31, 2004 from $6,583,000 for the three months ended December 31, 2003. For the three months ended December 31, 2004, the Company had net unrealized gains of $6,324,000 and net realized gains of $381,000. For the three months ended December 31, 2003, the Company had net unrealized gains of $2,911,000 and net realized gains of $3,672,000. 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. During the quarter, the Company recorded an impairment loss of $258,000 related to a private placement investment. Margin interest and trading expenses decreased to $824,000 from $1,932,000 primarily due to the decrease in the performance-based compensation earned by the Company's CEO for his management of the Company's investment portfolio to $320,000 from $1,192,000. Margin interest expense also decreased to $209,000 from $348,000 and trading expenses decreased to $293,000 from $392,000. General and administrative expenses decreased to $321,000 from $483,000 primarily to due to the reduction of annual corporate tax preparation fees to $30,000 from $120,000. Management continues to make efforts to reduce general and administrative expenses across the board. Other income decreased to $8,000 from $49,000 primarily due to the one time receipt of $36,000 in administrative fees for services provided by management to a third party during the three months ended December 31, 2003. -15- Minority interest expense increased to $596,000 from $444,000 due to the higher income generated by the Company's subsidiary, Santa Fe, in the current quarter. For the Six Months Ended December 31, 2004 Compared to the Six Months Ended December 31, 2003 The Company had net income of $2,725,000 for the six months ended December 31, 2004 compared to net income of $2,557,000 for the six months ended December 31, 2003. The increase in net income was primarily due to the gain on sale of real estate, the decrease in margin interest and trading expenses, the increase in dividend and interest income, the decrease in general and administrative expenses and the decrease in minority interest expense partially offset by the decrease in net investment gains, the higher loss from real estate operations, the change in the equity in net income(loss) from Justice Investors to a loss and the impairment loss on other investments. Rental income increased to $7,012,000 for the six months ended December 31, 2004 from $5,346,000 for the six months ended December 31, 2003 primarily due to the inclusion of rental income in the six months ended December 31, 2004 of the Company's 358-unit apartment in Las Colinas, Texas that was acquired in April 2004 and the exclusion from rental income in the comparable six months ended December 31, 2003 of the Houston, Texas property that was sold in September 2004. The revenues and expenses of the Houston, Texas property were excluded from the real estate operations and were required to be included under discontinued operations. The increase in rental income 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 $3,232,000 from $2,866,000 as the result the inclusion of operating expenses related to the new property in the six months ended December 31, 2004. Mortgage interest expense increased to $2,176,000 from $1,606,000 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 $333,000 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 in August 2004. 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 six months ended December 31, 2004 and 2003 were required to be reported as discontinued operations on the Statement of Operations. Equity in net income(loss) of Justice Investors changed to a loss of $280,000 compared to income of $444,000. Effective July 1, 2004, Justice became the owner-operator of the Hotel rather than a lessor. Thus, the Partnership net income for the first six months of fiscal 2005 includes the direct operating results of the Hotel, whereas in the prior year Justice received rental income from Felcor pursuant to a lease. The net operating loss from the Hotel for the -16- six months ended December 31, 2004 was approximately $185,000, while the Partnership received approximately $1,250,000 in rent from the Hotel lease for the six months ended December 31, 2003. The overall decrease in Partnership net income was primarily attributable to the net operating loss from the Hotel and increased costs in the current quarter related to professional fees for 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 modestly to approximately $93 for the six months ended December 31, 2004, compared to approximately $91 for the six months ended December 31, 2003, while average monthly occupancy rates decreased to approximately 69% compared to approximately 72% in the prior year. Those results primarily reflect the inability of the Hotel to currently meet its competition. The Hotel is facing 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 by entering into a new Franchise License Agreement to operate the Hotel as a Hilton Brand hotel after the renovation is complete. In addition, 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. Net investment gains on marketable securities decreased to $2,078,000 for the six months ended December 31, 2004 from $8,611,000 for the six months ended December 31, 2003. For the six months ended December 31, 2004, the Company had net unrealized gains of $1,573,000 and net realized gains of $505,000. For the six months ended December 31, 2003, the Company had net unrealized gains of $5,319,000 and net realized gains of $3,292,000. 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. During the six months ended December 31, 2004, the Company recorded an impairment loss of $258,000 related to a private placement investment. Dividend and interest income increased to $491,000 from $374,000 as a result of the increased investment in dividend yielding securities. Margin interest and trading expenses decreased to $1,400,000 from $2,454,000 primarily due to the decrease in the performance-based compensation earned by the Company's CEO for his management of the Company's investment portfolio to $320,000 from $1,192,000. Margin interest expense also decreased to $461,000 from $666,000 as the result of the maintenance of lower average margin balances. General and administrative expenses decreased to $702,000 from $841,000 primarily to due to the reduction of annual corporate tax preparation fees to $30,000 from $120,000. Management's continues to make efforts to reduce general and administrative expenses across the board. Other income increased to $94,000 from $62,000 primarily due to the receipt of $69,000 during the six months ended December 31, 2004 from Justice Investors for management's involvement in the positioning of the hotel. -17- Minority interest benefit(expense) changed to a benefit of $49,000 from an expense of $657,000 as a result of the loss generated by the Company's subsidiary, Santa Fe during the six months ended December 31, 2004. MARKETABLE SECURITIES The Company's investment portfolio is diversified with 96 different equity positions. Only three equity securities are more than 5% of the equity value of the portfolio, with the largest being 7.8%. 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 December 31, 2004, the Company had investments in marketable equity securities of $66,526,000. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups as of December 31, 2004. % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Electric, pipelines, oil and gas $11,304,000 17.0% Telecommunications and media 9,777,000 14.7% Semiconductor, software, computer and internet 8,239,000 12.4% REITs, Lodging, home builders, and Hotels 7,366,000 11.1% Pharmaceuticals and medical 6,637,000 10.0% Apparel, food and consumer goods 5,996,000 9.0% Chemicals, materials, metals, and mining 5,480,000 8.2% Airlines and defense 5,008,000 7.5% Insurance and banks 4,289,000 6.4% Other 2,430,000 3.7% ---------- ------ $66,526,000 100.0% ========== ====== 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 and six months ended December 31, 2004 and December 31, 2003, respectively. Three months ended Three months ended December 31, 2004 December 31, 2003 ------------ ------------ Net gains on marketable securities $ 6,705,000 $ 6,583,000 Impairment loss on other invest. (258,000) - Dividend & interest income 199,000 223,000 Margin interest expense (209,000) (348,000) Trading and management expenses (615,000) (1,584,000) ------------ ------------ Investment income $ 5,822,000 $ 4,874,000 ============ ============ -18- Six months ended Six month ended December 31, 2004 December 31, 2003 ------------ ------------ Net gains on marketable securities $ 2,078,000 $ 8,611,000 Impairment loss on other invest. (258,000) - Dividend & interest income 491,000 374,000 Margin interest expense (461,000) (666,000) Trading and management expenses (939,000) (1,788,000) ------------ ------------ Investment income $ 911,000 $ 6,531,000 ============ ============ 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 six months ended December 31, 2004, operating activities generated cash of $403,000, investing activities provided cash of $8,526,000 and financing activities used cash of $8,701,000. During the six months ended December 31, 2004, the Company made property improvements in the aggregate amount of $1,813,000. 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 six months ended December 31, 2004, the Company purchased 60,000 shares of its stock for $803,000. 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. -19- 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. 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. -20- (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. 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 2004 Shares Price Paid Announced Plans Under the Plans Period Purchased Per Share or Programs or Programs - -------------------------------------------------------------------------------------- Month #1 (Oct. 1- - - - 152,941 Oct. 30) - -------------------------------------------------------------------------------------- Month #2 (Nov. 1- - - - 152,941 Nov. 30) - -------------------------------------------------------------------------------------- Month #3 (Dec. 1- 40,000 $13.37 40,000 112,941 Dec. 31) - -------------------------------------------------------------------------------------- Total 40,000 $13.37 40,000 112,941 - --------------------------------------------------------------------------------------
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. -21- 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 filed the following report on Form 8-K during the quarter covered by this Report: Date of Report Item Numbers Events Reported - ---------------- ------------ ------------------------------------ October 15, 2004 Items 8.01 Press Release Announcing Increase in and 9.01 Stock Repurchase Program 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: February 11, 2005 by /s/ John V. Winfield ---------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: February 11, 2005 by /s/ David T. Nguyen ------------------------------ David T. Nguyen, Treasurer and Controller (Principal Accounting Officer) -22- EX-31 2 ig10qex311.txt EXHIBIT 31.1 CEO CERTIFICATION EXHIBIT 31.1 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 report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal control over financial reporting. Date: February 11, 2005 /s/ John V. Winfield --------------------------- John V. Winfield, President and Chief Executive Officer EX-31 3 ig10qex312.txt EXHIBIT 31.2 CFO CERTIFICATION EXHIBIT 31.2 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 report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal control over financial reporting. Date: February 11, 2005 /s/ David T. Nguyen --------------------------- David T. Nguyen, Treasurer and Controller (serving as Chief Financial Officer) EX-32 4 ig10qex321.txt EXHIBIT 32.1 CEO CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 In connection with the Quarterly Report of The InterGroup Corporation (the "Company") on Form 10-QSB for the quarterly period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John V. Winfield, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 11, 2005 /s/ John V. Winfield ---------------------------- John V. Winfield, President and Chief Executive Officer [A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation, Inc. and will be retained by The InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.] EX-32 5 ig10qex322.txt EXHIBIT 32.2 CFO CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 In connection with the Quarterly Report of The InterGroup Corporation (the "Company") on Form 10-QSB for the quarterly period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I David T. Nguyen, Treasurer and Controller of the Company, serving as Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 11, 2005 /s/ David T. Nguyen ---------------------------- David T. Nguyen, Treasurer and Controller (serving as Chief Financial Officer) [A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----